UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996     Commission file number  0-26450
                                                                        -------

                           ORION NETWORK SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                       52-2008654
----------------------------------                     --------------------
 (State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                        Identification No.)


          2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
          -------------------------------------------------------------
                   (Address of principal executive offices )



                                 (301-258-8101)
               ---------------------------------------------------
              (Registrant's telephone number, including area code)


          Securities registered pursuant to Section 12 (b) of the Act:
         ---------------------------------------------------------------
                                      None
                                 -------------

          Securities registered pursuant to Section 12 (g) of the Act:
          -------------------------------------------------------------

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
Yes X  No_

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of  registrant's  knowledge,  in definite proxy or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

The  aggregate  market  value of shares of Common  Stock held by  non-affiliates
(based on the February 28, 1997 closing price of these shares) was approximately
$101 million. The Common Stock is traded over-the-counter and quoted through the
NASDAQ National Market.

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

            Class                                Outstanding at March 15, 1997
----------------------------                     -----------------------------
Common Stock, $.01 par value                           11,160,099  shares

    

<PAGE>
   
                                EXPLANATORY NOTE

     This Form 10-K/A  amends Item 7 (Management's  Discussion  and  Analysis of
Financial  Condition  and  Results  of  Operations)  and  Item  8  (Consolidated
Financial Statements) to add the following:

     1.   One  sentence  is added to  Management's  Discussion  and  Analysis of
          Financial  Condition and Results of Operations  indicating  that there
          are no  restrictions  on the  subsidiaries  of the  registrant  paying
          dividends to the registrant.

     2.   Footnote 9 to the Consolidated  Financial Statements is amended to add
          the following:

          a.   the  registrant  is holding  company with no assets or operations
               other than its investments in its subsidiaries;

          b.   each of the registrant's  subsidiaries that guaranteed the senior
               notes issued by the registrant in January 1997 is a wholly (100%)
               owned subsidiary of the registrant and such subsidiaries comprise
               all of the direct and  indirect  subsidiaries  of the  registrant
               (other than inconsequential subsidiaries); and

          c.   separate  financial  statements of the subsidiary  guarantors are
               not  presented  because (i) such  subsidiaries  have  jointly and
               severally guaranteed such notes on a full and unconditional basis
               (ii) the aggregate  assets,  liabilities,  earnings and equity of
               such  subsidiaries  are  substantially  equivalent to the assets,
               liabilities,   earnings  and  equity  of  the   registrant  on  a
               consolidated  basis and (iii) management has determined that such
               information is not material to investors.


     These  items are  being  added in  connection  with an  application  by the
registrant  to  the  Securities  and  Exchange  Commission  for a  determination
(granted in June 1997) that the registrant need not include in its  Consolidated
Financial Statements separate financial  information  regarding its subsidiaries
which guaranteed the senior notes issued by the registrant in January 1997.

<PAGE>

                          ORION NETWORK SYSTEMS, INC.

                               TABLE OF CONTENTS


                                                                            Page

Item 7.    Management's  Discussion and Analysis of Financial Condition
            and Results of Operations                                        1
Item 8.    Financial Statements and Supplementary Data                       8

    
<PAGE>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

GENERAL

     Orion's principal business is the provision of satellite communications for
private  communications  networks  and video  distribution  and other  satellite
transmission services. From its inception in 1982 through January 20, 1995, when
Orion  1  commenced  commercial  operations,   Orion  was  a  development  stage
enterprise.  Prior to January 1995,  Orion's  efforts were devoted  primarily to
monitoring  the  construction,  launch and in-orbit  testing of Orion 1, product
development,  marketing  and sales of  interim  private  communications  network
services, raising financing and planning Orion 2 and Orion 3.

     During 1996,  OrionSat was the sole general  partner in Orion  Atlantic and
Orion had a 41 2/3% equity  interest in Orion  Atlantic.  As a result of Orion's
control of Orion Atlantic during 1996, Orion's consolidated financial statements
include the accounts of Orion  Atlantic.  All of Orion  Atlantic's  revenues and
expenses  are  included  in  Orion's  consolidated  financial  statements,  with
appropriate adjustment to reflect the interests of the Limited Partners in Orion
Atlantic's losses prior to the Exchange.  The assets and liabilities reported in
the  consolidated  balance  sheets at December  31, 1996 and  December  31, 1995
primarily pertain to Orion Atlantic.

   
     All   subsidiaries  of  Orion  other  than   inconsequential   subsidiaries
("Subsidiary  Guarantors"),  have fully and unconditionally guaranteed the Notes
(as defined below) on a joint and several basis.  No  restrictions  exist on the
ability  of  the   Subsidiary   Guarantors   to  pay  dividends  or  make  other
distributions  to Orion,  except to the extent provided by law generally  (e.g.,
adequate capital to pay dividends under state corporate laws).
    

RECENT DEVELOPMENTS

     In  January  1997,  Orion  consummated  a series of  transactions  that are
described below.

   ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE

     On January 31, 1997,  the Company  acquired all of the limited  partnership
interests  which it did not already own in the Company's  operating  subsidiary,
Orion  Atlantic,  that owns the Orion 1  satellite.  Specifically,  the  Company
acquired  the Orion  Atlantic  limited  partnership  interests  and other rights
relating  thereto  held  by  British  Aerospace  Communications,  Inc.,  COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette,  and Trans-Atlantic  Satellite,  Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").

     Pursuant to a Section 351 Exchange  Agreement and Plan of  Conversion  (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion  Atlantic  limited  partnership  interests  for 123,172  shares of a newly
created class of the Company's  Series C 6%  Cumulative  Convertible  Redeemable
Preferred  Stock (the  "Series C Preferred  Stock").  In  addition,  the Company
acquired  certain rights held by certain of the Exchanging  Partners' to receive
repayment  of  various  advances  (aggregating  approximately  $41.4  million at
December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the
Exchange are convertible  (as of January 31, 1997) into  approximately 7 million
shares of the Company's  Common Stock.  As a result of the Exchange,  certain of
the  Exchanging  Partners  became  principal  stockholders  of the Company.  The
Exchange is  described in greater  detail  under the caption  "The  Merger,  the
Exchange and the Debenture  Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).

     The Exchange  and the  acquisition  by the Company of the only  outstanding
minority  interest in the Company's  subsidiary  Orion Asia Pacific  Corporation
from  British  Aerospace  Satellite  Investments,  Inc.  on  January 8, 1997 (in
exchange for approximately  86,000 shares of the Company's Common Stock) results
in the  Company  owning  100%  of  Orion  Atlantic  and  its  other  significant
subsidiaries and, therefore, a greatly simplified corporate structure.

   THE MERGER

     The  Exchange  was  conducted  on a  tax-free  basis  by  means of a Merger
(defined  below)  that was  consummated  on January  31,  1997.  Pursuant to the
Exchange Agreement,  Orion Oldco Services, Inc., formerly known as Orion Network
Systems,  Inc. ("Old Orion"),  formed the Company as a new Delaware  corporation
with a certificate of incorporation,  bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement,  the Company formed a wholly owned subsidiary,  Orion Merger
Company, Inc. ("Orion Merger Subsidiary").  Pursuant to an Agreement and Plan of
Merger,  Orion  Merger  Subsidiary  was merged with and into Old Orion,  and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received  stock in the Company with  substantially  identical  rights to the Old
Orion stock they held prior to the effective  time of the Merger.  Following the
Merger,  the Company changed its name from Orion Newco  Services,  Inc. to Orion
Network  Systems,  Inc. and the Company's  wholly owned subsidiary Orion Network
Systems,  Inc.  changed its name to Orion Oldco Services,  Inc. The Exchange and
Merger are  described  in greater  detail  under the caption  "The  Merger,  the
Exchange and the Debenture  Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).

   The  Company is the  successor  issuer to Old Orion and filed a  Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997,  to register  all the issued and  outstanding  shares of Common  Stock and
preferred  stock of the Company.  The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's  Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI."

                                       1
<PAGE>




   FINANCINGS

     On January 31, 1997,  the Company  completed a $710  million bond  offering
(the "Bond  Offering")  comprised of  approximately  $445 million of Senior Note
Units,  each of which  consists  of one 11.25%  Senior  Note due 2007 (a "Senior
Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01
per share  ("Common  Stock")  of the  Company  (a "Senior  Note  Warrant"),  and
approximately  $265.4  million  of Senior  Discount  Note  Units,  each of which
consists of one 12.5% Senior  Discount Note due 2007 (a "Senior  Discount Note,"
and  together  with the Senior  Notes,  the "Notes") and one Warrant to purchase
0.6628  shares of Common Stock of the Company (a "Senior  Discount Note Warrant,
and together with the Senior Note  Warrants,  the  "Warrants").  Interest on the
Senior Notes will be payable  semi-annually in cash on January 15 and July 15 of
each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash
interest prior to January 15, 2002. Thereafter,  cash interest will accrue until
maturity at an annual rate of 12.5% payable semi-annually on January 15 and July
15 of each year,  commencing  July 15, 2002. The exercise price for the Warrants
will be $.01 per  share of Common  Stock of the  Company.  The  shares of Common
Stock of the Company initially  issuable upon exercise of the Warrants represent
approximately  2.62% of the  outstanding  Common Stock of the Company on a fully
diluted  basis as of January 31, 1997.  The Bond  Offering was  underwritten  by
Morgan  Stanley  & Co.  Incorporated  and  Merrill  Lynch  & Co.  The  foregoing
description of the Notes is qualified in its entirety by the description of such
Notes in the Indentures and Notes documents,  copies of which have been filed as
exhibits to this Annual Report on Form 10-K.

     On January 31, 1997,  the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors,  British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space").  British  Aerospace  purchased
$50 million of the Convertible  Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Convertible Debentures
Offering,"  and  together  with  the  Bond  Offering,  the  "Financings").   The
Convertible  Debentures will mature in 2012, and will bear interest at a rate of
8.75% per annum to be paid  semi-annually  in arrears  solely in Common Stock of
the  Company.   The  Convertible   Debentures  are  subordinated  to  all  other
indebtedness of the Company, including the Notes.

     The net proceeds of the Bond Offering and Convertible  Debentures  Offering
were used by the  Company  to repay the Orion 1 credit  facility,  pre-fund  the
first three years of interest payments on certain of the Notes, and will be used
to build and launch of two additional satellites, Orion 2 and Orion 3.

   ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION

     Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of
Orion 2 in  February  1997 under a  satellite  procurement  contract  with Matra
Marconi  Space for Orion 2. The  contract  for Orion 2 provides  for delivery in
orbit of Orion 2 by June  1999,  excluding  launch  insurance,  for a firm fixed
price of $201 million.  Orion commenced construction of Orion 3 in December 1996
and entered  into a satellite  contract  with  Hughes  Space and  Communications
International,  Inc.  for Orion 3 in  January  1997.  The  contract  for Orion 3
provides for  delivery in orbit of Orion 3 by December  1998,  excluding  launch
insurance, for a firm fixed price of $208 million.

     Pre-Construction  Lease on Orion 3. Orion has entered into a contract  with
DACOM Corp., a Korean communications company ("DACOM"),  under which DACOM will,
subject to certain conditions, lease eight dedicated transponders on Orion 3 for
13 years, in return for  approximately  $89 million,  payable over a period from
December 1996 through seven months following the lease commencement date for the
transponders (which is scheduled to occur by January 1999). Payments are subject
to refund unless Orion 3 commences commercial operation by June 30, 1999.

OVERVIEW

     Orion's  revenues  are  principally  generated  under  three  to four  year
contracts  for delivery of  communications  services.  Such revenues are derived
principally  from  recurring  monthly  fees from its  customers,  although  many
contracts  include  initial  non-recurring  installation  and other fees.  These
non-recurring  fees generally are structured to cover the Company's actual costs
of installation of the customer's site-based  equipment.  The revenues from each
contract  vary,  depending  upon the type of service,  amount of capacity,  data
handling ability of the network,  the number of VSATs (which generally are owned
by Orion),  value-added services and other factors.  Depending on the complexity
of the  services to be provided  to a customer,  the period  between the date of
signature of a contract and the  commencement of actual services (and receipt of
fees) typically ranges from 30 days to six months.  Substantially all of Orion's
contracts  are  denominated  in  U.S.  dollars,   although  some  contracts  are
denominated  in pounds  sterling,  deutschemarks,  Austrian  shillings or French
francs.  Orion  begins  to record  revenues  under its  contracts  upon  service
commencement to the customer.

     The services  provided by Orion have been subject to decreasing prices over
recent  years  and this  pricing  pressure  is  expected  to  continue  (and may
accelerate) for the foreseeable future,  particularly if, as expected,  capacity
continues to increase.  Orion will need to increase its volume of sales in order
to compensate  for such price  reductions.  Orion  believes that  customers will
increase  the data  speeds  in their  communications  networks  to  support  new
applications,  and  that  such  upgrading  of  customer  networks  will  lead to
increased  revenues that will mitigate the effect of price reductions.  However,
there can be no  assurance  that this will occur.  Orion  expects to continue to
incur  increasing net losses and negative cash flow (after  payments for capital
expenditures and interest) for the foreseeable future.

                                       2
<PAGE>




     Orion's direct cost of services includes  principally (i) costs relating to
the  installation,  maintenance  and  licensing  of VSAT earth  stations  at its
customers'  premises;  (ii) satellite  lease payments for  transponder  capacity
(generally for services outside of the Orion 1 footprint);  and (iii) associated
miscellaneous expenses.  Sales and marketing expenses consist of salaries, sales
commissions (including commissions to third party sales representatives), travel
and  promotional  expenses.  The Company has  recently  commenced a  significant
expansion  of its  marketing  program  and expects to  continue  this  expansion
through 1997. Due to the complexity of the Company's services, and the continued
expansion  of sales  personnel,  sales and  marketing  expense  is  expected  to
increase   significantly  during  1997.   Engineering  and  technical  expenses,
consisting  principally of personnel costs and travel,  relate to TT&C,  network
monitoring,  network design and similar activities.  The Company constructed its
TT&C facilities to control two satellites.  As a result, the Company anticipates
a slight increase in costs with Orion 2 and a more substantial increase in costs
with  Orion  3,  which  will  require  separate  TT&C  facilities.  General  and
administrative expenses consist of in-orbit insurance premiums,  personnel costs
other  than for  selling  and  engineering,  information  systems,  professional
services,  and  occupancy  costs.  These costs will  increase  generally  as the
Company's  operations  expand.  Specifically,   in-orbit  insurance  costs  will
increase  significantly   following  the  launches  of  Orion  2  and  Orion  3.
Depreciation  and  amortization  expenses result mainly from the depreciation of
the Orion 1 satellite,  VSATs and the related equipment to service the expansion
of the private network communication  services business (see Note 2 of the Notes
to Consolidated  Financial Statements) and will increase substantially after the
launch  of Orion 2 and  Orion 3.  Interest  income is  primarily  the  result of
interest  earned  on  the  proceeds  from  Orion's  private  and  public  equity
offerings.  Interest costs will increase  substantially  as a result of the bond
offering  completed  January 31, 1997, and will increase again after  additional
financing for Orion 2 and Orion 3 is obtained.  Such  financing will be required
substantially  in advance of the  anticipated  revenues from Orion 2 or Orion 3.
Orion's costs (other than sales commissions) generally do not vary substantially
with the amount of revenue from the Orion 1 satellite.

RESULTS OF OPERATIONS

   YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

     Revenue.  Total  revenue  for the year ended  December  31,  1996 was $41.8
million,  compared to $22.3  million for the same period in 1995, an increase of
87%. Revenues from private communications network services were $17.0 million in
1996 compared to $10.0 million for the comparable  period in 1995, as the number
of sites in  service  increased  to 322 as of  December  31,  1996,  from 151 at
December  31,  1995.  Revenues  from  video  distribution  and  other  satellite
transmission  services were $24.8 million for 1996 compared to $12.3 million for
the same period in 1995 resulting  from a substantial  increase in customers for
these services in 1996.

   OPERATING EXPENSES

     Direct expenses. Direct expenses for the year ended December 31, 1996, were
$6.0 million compared to $10.5 million for the same period in 1995. The decrease
of $4.5 million,  or 43%, was primarily  attributable  to accruals for satellite
incentive  obligations  owed  by  Orion  to the  contractor  under  the  Orion 1
Satellite  Contract during the initial satellite  deployment period from January
20, 1995 through June 30, 1995. The Company capitalized the present value of the
remaining  satellite  incentive   obligation  of  approximately  $14.8  million,
effective July 1, 1995, as part of the cost of the satellite. As of December 31,
1996, Orion had obligations with a present value of approximately  $22.4 million
with respect to satellite incentives.

     Sales and  marketing  expenses.  Sales and  marketing  expenses  were $11.5
million for the year ended December 31, 1996, as compared to $8.6 million in the
same  period  of  1995.  The  increase  of  $2.9  million,  or 34% is  primarily
attributable to sales  commissions,  third party sales  representative  fees and
ground operator fees  associated  with the growth in the private  communications
network service business.

     Engineering and technical expenses. Engineering and technical expenses were
$8.7 million in the year ended  December  31, 1996,  as compared to $8.5 million
for the comparable period in 1995. The increase was due to customer  engineering
functions  in support of the growth in private  communications  network  service
business.

     General and administrative  expenses.  General and administrative  expenses
were $15.1  million  for the year ended  December  31,  1996,  compared to $10.1
million for the period ended December 31, 1995. The increase of $5.0 million, or
50%, for the year ended  December 31, 1996 was primarily due to the inclusion of
the cost of in-orbit  life  insurance  for the entire  period  during 1996.  The
policy became effective in May 1995.

     Depreciation and  amortization.  Depreciation and amortization  expense for
the year ended  December  31,  1996,  was $36.9  million,  an  increase  of $5.5
million,  or 18%,  over the same period in 1995.  The  increase  is  primarily a
result from  depreciation  of VSATs and other  ground  equipment  to service the
expansion of the private network services business and depreciation of the Orion
1 satellite, which was placed in service January 20, 1995.

     Interest.  Interest income was $2.3 million for the year ended December 31,
1996,  compared  to $1.9  million  for the year ended  December  31,  1995.  The
increase in interest  income  ($0.4  million or 21%) during 1996 is  primarily a
result of interest  earned on increased  cash  balances from the proceeds of the
Company's  initial public  offering in August 1995.  Interest  expense was $27.8
million for the year ended December 31, 1996,  compared to $24.7 million for the
comparable  period in 1995. The increase in interest  expense of $3.1 million in
1996 is attributable to expensing interest (including  commitment fees, interest
accretion  associated  with  the  Orion 1  satellite  incentive  obligation  and
amortization  of deferred  financing  costs) from the in-service date of Orion 1
and the  impact  of an  interest  rate  cap  agreement  in  1996.  Prior  to the
in-service date of Orion 1, substantially all interest expense was capitalized.

                                       3
<PAGE>




     Other.  Other  expenses  were $.02 million for the year ended  December 31,
1996,  compared to $3.4  million for the same  period in 1995.  The  decrease is
primarily related to costs incurred in connection with Orion Atlantic's plans to
raise financing for Orion 2, which plans were deferred in November 1995.

     Net loss. The Company  incurred a net loss of $27.2 million,  compared to a
net loss of $26.9  million  for the  years  ended  December  31,  1996 and 1995,
respectively,  after deduction of the limited partners' and minority  interests'
share in the Company's  losses before  minority  interests' of $34.6 million and
$46.1 million,  respectively.  Net loss is expected to increase substantially in
subsequent  periods  as a result of  interest  expense  on the  notes  issued in
connection with the offering in January 1996 and the elimination of the minority
interests in Orion Atlantic.

   YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

     Revenue.  Services  revenue  for 1995 was $22.3  million  compared  to $3.4
million for 1994.  Revenues from private  communications  network  services were
$10.0  million  from 72  customers in 1995 and $3.4 million from 18 customers in
1994, as the number of sites in service  increased to 151 from 53. Revenues from
transmission  capacity and video distribution services were $12.3 million during
1995.  There  were no  revenues  from these  services  during  1994,  as Orion 1
commenced operations on January 20, 1995.

   OPERATING EXPENSES

     Direct  expenses.  Direct  expenses  were $10.5 million and $3.5 million in
1995 and  1994,  respectively.  The  increase  of $7.0  million,  or  199%,  was
primarily  attributable to accruals for satellite  incentives during 1995, which
were not applicable  prior to launch in November  1994,  costs  associated  with
equipment  sales  ($2.5  million  in 1995,  $0 in 1994),  and  installation  and
maintenance  costs in connection with higher volumes of customer sites placed in
service  during  1995  ($1.3  million  in 1995,  $0.5  million  in 1994).  These
increases were partially  offset by a reduction in leased  transponder  capacity
costs  as  customers  were  transferred  from  leased  capacity  to  Orion 1. No
equipment sales occurred during 1994.

     Sales and  marketing  expenses.  Sales  and  marketing  expenses  were $8.6
million in 1995,  as  compared  to $5.9  million in 1994,  an  increase  of $2.7
million or 47%. The increase is due to the hiring of additional sales personnel,
increased advertising and promotion expenses associated with increased sales and
equipment sales commissions.

     Engineering and technical expenses. Engineering and technical expenses were
$8.5 million in 1995,  as compared to $3.0 million for 1994, an increase of $5.5
million or  approximately  184%.  The  increase  is  attributable  to  increased
staffing  requirements  related to control and operation of the  satellite,  and
customer  engineering  functions  in support  of the  expansion  of the  network
services business.

     General and administrative  expenses.  General and administrative  expenses
were $10.1 million for 1995  compared to $5.1 million for 1994.  The increase of
$5.0  million or 99% was  primarily  due to the cost of in-orbit  insurance  for
Orion 1,  beginning  in May  1995,  and  other  costs  associated  with  Orion's
commencement of full commercial operations.

     Depreciation  and  amortization.  Depreciation  and  amortization was $31.4
million in 1995, an increase of $29.7  million,  as compared to $1.7 million for
1994. The increase  primarily  resulted from the commencement of depreciation of
Orion 1 upon being placed in service January 20, 1995.

     Interest.  Interest  income was $1.9  million  for 1995,  compared  to $0.4
million for the prior year.  The  increase  in  interest  income  during 1995 is
primarily a result of interest  earned on proceeds from Orion's  initial  public
offering  in  August  1995.  Interest  expense,  net  of  capitalized  interest,
increased from $0.06 million for 1994 to $24.7 million for 1995. The increase in
interest  expense  in 1995 is  attributable  to  expensing  interest  (including
commitment  fees  and  amortization  of  deferred   financing  costs)  from  the
in-service  date of Orion 1.  Prior to that  date,  substantially  all  interest
expense was capitalized as part of the cost of Orion 1.

     Other. Other expenses of $3.4 million for the year-ended  December 31, 1995
are  primarily  related to costs  incurred in connection  with Orion  Atlantic's
plans to raise  financing  for Orion 2, which  plans were  deferred  in November
1995.

     Net loss. The Company incurred a net loss of $26.9 million and $8.0 million
for 1995 and 1994,  respectively,  after deduction of the Limited  Partners' and
minority  interests'  share in the  Company's  results  of  operations  of $46.1
million and $7.4 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     Prior  Funding.  Orion has required  significant  capital for operating and
investing  activities in the  development of its business,  and will continue to
need to expend significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding for its operations
through  January  1997  had  been  provided  primarily  by the  sale  of  equity
securities,  including the completion of its initial  public  offering in August
1995 which generated  proceeds to the Company of approximately  $52 million (net
of underwriting discounts), bank loans, vendor financing, lease arrangements and
short-term loans from its investors.  Funding for the construction and launch of
the Orion 1 satellite and related  facilities  was fully  committed  through $90
million of equity from the limited  partners of Orion Atlantic,  an aggregate of
$251 million under a secured bank credit facility and  approximately $11 million
under other debt facilities, dedicated primarily to the construction of the TT&C
facility,  which is being used to control  Orion 1. The Orion 1 credit  facility
was  refinanced  in January 1997 with the proceeds from the Bond  Offering,  and
concurrently  with  the  Bond  Offering,  Orion  acquired  all  of  the  limited
partnership  interests (those which it did not already own) in Orion Atlantic in
exchange for 123,172 shares of Series C Convertible Preferred Stock representing
approximately 7 million underlying common shares.

                                       4
<PAGE>

     Existing  Capital  Resources.  The net  proceeds of the  January  1997 Bond
Offering to the Company were approximately $684 million, and the net proceeds of
the Convertible  Debentures Offering were approximately $59 million. Of the Bond
Offering  proceeds,  approximately  $223  million was used for  repayment of the
Orion 1 credit  facility  (including  payment  of  accrued  interest  and  hedge
breakage  costs),  approximately  $24 million was used to make  certain  initial
payments for the Orion 2 satellite contract,  approximately $13 million was used
to pay accrued satellite incentive fees under the Orion 1 satellite contract and
approximately $4 million was used to pay amounts owing to STET, a former limited
partner of Orion Atlantic. On a pro forma basis, after giving effect to the Bond
Offering,  the Convertible Debentures Offering and other related transactions as
of December 31, 1996, the Company had cash and cash  equivalents of $140 million
and restricted and segregated cash of $407 million  including $273 million which
was  segregated  in the  financial  statements by the Company to be used to make
payments for  additional  satellites and certain  related costs.  The restricted
cash  consisted  of $134  million  placed in a pledged  account (to pre-fund the
first six interest payments on the Senior Notes).

     Existing Indebtedness

         Notes. In the Bond Offering, Orion issued approximately $445 million of
11.25% Senior Notes due 2007 and approximately  $484 million principal amount at
maturity  ($265.4 million initial accreted value) of 12.5% Senior Discount Notes
due 2007.  Interest  on the  Senior  Notes is payable  semi-annually  in cash on
January  15 and July 15 of each  year,  commencing  July 15,  1997.  The  Senior
Discount  Notes  do  not  accrue  cash  interest  prior  to  January  15,  2002.
Thereafter,  cash interest will accrue until maturity at an annual rate of 12.5%
payable  semi-annually  on January 15 and July 15 of each year,  commencing July
15, 2002.

         The Notes have the benefit of Guarantees issued by each of the material
subsidiaries  of the  Company.  The Senior  Notes  initially  are secured by the
securities  purchased with the $134 million held in a pledged  account until the
Company makes the first six scheduled  interest payments on the Senior Notes and
thereafter  the Senior Notes will be unsecured.  The Senior  Discount  Notes are
unsecured.  The Notes are redeemable,  at the Company's  option,  in whole or in
part, at any time on or after January 15, 2002 at specified  redemption  prices.
In the event of a change of control  (as defined in the  indentures  relating to
the  Notes),  the Company  will be  obligated  to make an offer to purchase  all
outstanding  Notes at a  purchase  price  equal to 101% of  their  principal  or
accreted value, plus accrued and unpaid interest thereon to the repurchase date.

         The  indebtedness  evidenced  by the Notes ranks pari passu in right of
payment with all existing and future unsubordinated  indebtedness of the Company
and the guarantors, respectively, and senior in right of payment to all existing
and future  subordinated  indebtedness  of the Company and the  guarantors.  The
indentures  relating to the Notes (the  "Indentures")  contain certain covenants
which,  among  other  things,  restrict  distributions  to  stockholders  of the
Company,  the  repurchase  of equity  interests in the Company and the making of
certain other investments and restricted payments,  the incurrence of additional
indebtedness  by the Company and its  restricted  subsidiaries,  the creation of
certain liens,  certain asset sales,  transactions  with  affiliates and related
parties, and mergers and consolidations.  The foregoing description of the Notes
is qualified in its entirety by the  description of such Notes in the Indentures
and Notes documents,  copies of which have been filed as exhibits to this Annual
Report on Form 10-K.

         Convertible Debentures. In January 1997, the Company also completed the
sale of $60 million of its convertible junior subordinated debentures to British
Aerospace ($50 million) and Matra Marconi Space ($10 million).  The  Convertible
Debentures  will mature in 2012,  and will bear  interest at a rate of 8.75% per
annum to be paid  semi-annually in arrears solely in Common Stock of the Company
at prices of between  $10.21 and $14.00  per  share,  depending  on the  average
trading prices of the Common Stock during the applicable measurement period. The
Convertible  Debentures  (and accrued but unpaid  interest)  may be converted in
whole or in part into Common Stock at any time at an initial  conversion rate of
$14.00 per  share,  as  adjusted  for stock  splits or other  recapitalizations,
certain dividends or issuances of stock to all stockholders,  issuances of stock
(or  certain  rights to acquire  stock) at a price per share below  $14.00,  and
other events.

         Orion may at any time (except during 90 days after a change in control)
redeem  all  or  part  (but  not  less  than  25% on any  one  occasion)  of the
Convertible  Debentures for cash  consideration  determined by  multiplying  the
number of shares of Common Stock  issuable upon  conversion  of the  Convertible
Debentures  by the greater of (i) the average  closing price of the Common Stock
over the 20 trading  days  preceding  the  redemption  or (ii) $17.50 per share.
Alternatively,  Orion,  in its sole  discretion,  may effect the sale  through a
public or private  offering,  of the Common  Stock  underlying  the  Convertible
Debentures or received as payment of dividends on, the  Convertible  Debentures.
In such event,  the holders of the  Convertible  Debentures  will be entitled to
receive  a price  per  share  equal to the  greater  of (a) at least  95% of the
average  closing price of the Common Stock over the preceding 20 trading days or
(b)  $17.50  per  share.  From and after the time when less than $50  million of
Notes remain outstanding,  in the event of a change of control of Orion (defined
as the acquisition by any stockholder of a majority of the voting  securities of
Orion), either Orion or any holder of the Convertible  Debentures may, within 90
days  after  such  change  of  control,  require  the  sale  of the  Convertible
Debentures,  as converted into Common Stock, to Orion for a purchase price equal
to the greater of (a) the price payable in an optional  redemption (as described
above)  and (b) the  price  paid to  holders  of Common  Stock in the  change of
control transaction.  The Indentures for the Notes contain a covenant which will
effectively prohibit Orion from honoring such right.

         The Convertible  Debentures are subordinated to all other  indebtedness
of the Company,  including the Notes. The Convertible Debentures contain minimal
covenants  and  events of  default  so long as $50  million or more of the Notes
remain outstanding,  but a more extensive set of covenants and events of default
will apply after less than $50 million of Notes are outstanding.

         Other  Indebtedness  and Other  Obligations.  At December 31, 1996, the
Company had outstanding indebtedness of approximately $7.0 million under a seven
year term loan provided by General Electric Capital Corporation ("GECC") for the
TT&C facility, which is secured by the TT&C facility and various assets relating
thereto.  Additionally,  at December  31, 1996 the  Company had  obligations  of
approximately $44 million, with a present value of $22.4 million, payable to the
manufacturer  of Orion 1 through  2007 (of which $13 million was paid in January
1997 upon

                                        5
<PAGE>
the completion of the Bond Offering), and $8 million payable to a former partner
in Orion Atlantic through 1997 (of which approximately $5 million, plus interest
of approximately  $1.7 million was paid in cash in January 1997 upon the closing
of the Bond Offering).

         Current Funding  Requirements.  Based upon its current expectations for
growth, the Company  anticipates it will have substantial  funding  requirements
over the next three years to fund the costs of Orion 2 and Orion 3, the purchase
of VSATs, other capital  expenditures and other capital needs.  Interest charges
on the  Senior  Notes  over the next  three  years  are  fully  provided  for by
Restricted Cash.

         The in-orbit  delivered costs of the Orion 2 and Orion 3 satellites are
expected to aggregate  approximately $500 million. In addition to the $3 million
paid in the  fourth  quarter  of  1996,  Orion  will  need to make  payments  of
approximately  $98 million  ($37.3  million of which had already been paid as of
March  1,  1997),  $350  million  and  $50  million  in  1997,  1998  and  1999,
respectively. These amounts include the Company's estimate regarding the cost of
launch  insurance,  although the Company has not had material  discussions  with
potential insurers and has not received any commitment to provide insurance. The
contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction
and launch of those  satellites  and  provides  for  penalties  in event of late
delivery by the  manufacturer,  however,  the Company's actual payments could be
substantially  higher due to any change  orders  for the  satellites,  insurance
rates, delays and other factors.

         The Company  anticipates  that its existing  cash balances and payments
under the DACOM  contract will be sufficient  to meet  substantially  all of its
capital  requirements  for the  delivery  in orbit  of  Orion 2 and  Orion 3. In
connection  with the Bond Offering,  the Company  segregated $273 million of the
net proceeds to make  payments for  additional  satellites  and certain  related
costs (or to pay interest and principal on the Notes).  The Company also can use
a portion  of its  working  capital  for such  costs if it chooses to do so. The
Company had working  capital of $126 million at December 31, 1996 (after  giving
effect  to the  Transactions).  However,  there  can be no  assurance  that cost
increases for Orion 2 and/or Orion 3 due to change  orders,  insurance  rates or
construction  delays, among other factors may not increase the Company's capital
requirements  or that  the  Company's  growth  may vary  from  its  expectations
resulting in changes in its cash requirements or expected cash.

   The balance of the Company's  funding  requirements  are  dependent  upon its
growth and cash flow from  operations.  The Company cannot  predict  whether its
existing  resources  and cash flows will be  adequate  to cover its future  cash
needs.  If existing  resources  and cash flows are not  sufficient  to cover the
Company's  future  cash  needs,  the  Company  will  need  to  raise  additional
financing. The Company does not have a revolving credit facility or other source
of readily available  capital.  Sources of additional capital may include public
or private debt, equity financings or strategic investments.  To the extent that
the company seeks to raise  additional debt financing,  the Indentures limit the
amount of such additional debt (under a variety of provisions  contained in such
Indentures)  and  prohibit the Company from using Orion 1, Orion 2 or Orion 3 as
collateral  for  indebtedness  for  money  borrowed.  If  the  Company  requires
additional  financing and is unable to obtain  financing from outside sources in
the amounts and at the times needed, there would be a material adverse effect on
the Company.

TAXES

     As of December 31, 1996,  Orion had net operating  loss  carryforwards  for
federal tax purposes of  approximately  $77.7  million.  The ability of Orion to
benefit from net operating losses for federal income tax purposes will depend on
a number of factors, including whether Orion has sufficient income from which to
deduct  the  losses,  limitations  that may arise as a result of  changes in the
ownership of Orion, including as a result of the Transactions and other factors,
and  certain  other  limitations  which may  significantly  reduce the  economic
benefit of those losses to Orion.  Due to  uncertainty  regarding its ability to
realize the benefits of such net operating loss  carryforwards,  the Company has
established a valuation  allowance for the full amount of its net operating loss
carryforwards.  Of Orion's net operating losses, approximately $58.9 million was
incurred by Orion Atlantic and allocated to Orion.  Orion Atlantic is structured
as a partnership  for U.S.  income tax  purposes.  As a result,  Orion  Atlantic
itself generally should not be subject to federal income taxation.  Instead, the
partners of Orion Atlantic, including Orion and OrionSat, will separately report
their allocable shares of Orion Atlantic's net income,  loss, gain,  deductions,
and credits,  as determined  under the allocation  provisions of the Partnership
Agreement. Orion Atlantic may, however, be subject to income tax on a portion of
its income in certain  states and other  countries  in which it has  operations.
Under the  Partnership  Agreement,  the  first $20  million  of any  losses  was
allocated to OrionSat,  and any losses in excess of that amount  generally  have
been allocated to the partners,  including Orion and OrionSat,  in proportion to
their  respective  percentage  interests.  Subsequent  to  consummation  of  the
Exchange, all losses will be allocated to Orion.

EFFECT OF INFLATION

     Orion believes that inflation has not had a material  effect on the results
of operations to date.

                                        6
<PAGE>




EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

     In March  1995,  the FASB issued  Statement  No.  121,  Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of,
which  requires  impairment  losses to be recorded on long-lived  assets used in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less than the  assets'
carrying amount.  Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Orion  adopted  Statement No. 121 in
the first  quarter  of 1996.  The effect of  adoption  was not  material  to its
financial condition or results of operations.

     In October 1995,  the FASB issued  Statement No. 123,  Accounting for Stock
Based  Compensation,  which is effective for awards after January 1, 1996. Orion
has elected to continue to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related  Interpretations
in  accounting  for  its  employee  stock  based  award  programs,  because  the
alternative  fair value  accounting  provided for under FASB  Statement  No. 123
requires  use of option  valuation  models  that were not  developed  for use in
valuing  employee  stock  options.  Under APB 25, when the exercise price of the
employee  award equals the market price of the  underlying  stock on the date of
grant, as has been the case  historically  with Orion's awards,  no compensation
expense is recognized.


                                        7
<PAGE>




ITEM 8.  REPORT OF INDEPENDENT AUDITORS.

The Board of Directors
Orion Network Systems, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheets of Orion
Network  Systems,  Inc.  as of  December  31,  1996 and  1995,  and the  related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended  December 31, 1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated  financial position of Orion Network
Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1996, in conformity with generally accepted accounting principles.



                                ERNST & YOUNG LLP



Washington, DC
March 7, 1997


                                        8
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                        December 31,               December 31,
                                                                            1996                       1995
                                                                       --------------               -------------
<S>                                                                    <C>                          <C>         
Assets
Current assets:
  Cash and cash equivalents                                           $    42,187,807               $ 55,111,585
  Accounts receivable (less allowance for doubtful accounts of
    $100,000 and $278,000 at December 31, 1996 and 1995, respectively)      6,473,316                  5,189,598
  Notes receivable and accrued interest                                        78,969                    129,810
  Prepaid expenses and other current assets                                 3,504,434                  3,168,058
                                                                       --------------               -------------
Total current assets                                                       52,244,526                 63,599,051

Property and equipment, at cost:
  Land                                                                         73,911                     73,911
  Telecommunications equipment                                             25,342,528                 13,836,841
  Furniture and computer equipment                                          4,849,711                  3,395,799
  Satellite and related equipment                                         321,247,346                321,407,936
                                                                       --------------               -------------
                                                                          351,513,496                338,714,487
  Less:  accumulated depreciation                                         (68,224,957)               (32,170,865)
  Satellite construction in progress                                        4,560,844                    510,613
                                                                       --------------               -------------
  Net property and equipment                                              287,849,383                307,054,235

Deferred financing costs, net                                              12,918,233                 12,894,720
Other assets, net                                                           5,252,302                  5,527,221
                                                                       --------------               -------------
    Total assets                                                      $   358,264,444              $ 389,075,227
                                                                       ==============               =============
Liabilities and stockholders' equity (deficit) Current liabilities:
  Accounts payable                                                    $     6,411,028               $ 10,454,723
  Accrued liabilities                                                       7,653,208                  6,812,223
  Other current liabilities                                                 5,406,072                  2,111,687
  Interest payable                                                          8,583,882                  8,005,079
  Current portion of long-term debt                                        34,975,060                 28,607,110
                                                                       --------------               -------------
    Total current liabilities                                              63,029,250                 55,990,822

Long-term debt                                                            218,236,839                250,669,286
Other liabilities                                                          46,348,291                 20,698,084

Limited Partners' interest in Orion Atlantic                               10,130,058                 14,626,338
Minority interest in other consolidated entities                               54,008                     52,354
Commitments and contingencies (Note 4)
Series A 8% Cumulative  Redeemable  Convertible Preferred Stock,
  $.01 par value; 15,000 shares  authorized;  13,871 and  14,491
  shares issued and  outstanding at  December 31, 1996 and 1995,
  respectively, plus accrued dividends                                     16,097,880                 15,705,054
Series B 8% Cumulative  Redeemable  Convertible Preferred  Stock,
  $.01 par value; 5,000 shares authorized; 4,298 and 4,483 shares
  issued   and   outstanding  at  December  31,  1996  and  1995,
  respectively, plus accrued dividends                                      4,804,486                  4,652,647
Stockholders' equity (deficit):
  Common stock,  $.01 par value;  40,000,000  shares  authorized;
  11,244,665 and 11,115,965 issued, 10,985,150 and 10,856,450 out-
  standing  at  December 31, 1996  and  1995, respectively, less
  259,515 held as treasury shares (at no cost)                                112,447                    111,160
  Capital in excess of par value                                           86,932,391                 85,485,613
  Accumulated deficit                                                     (87,481,206)               (58,916,131)
                                                                       --------------               -------------
    Total stockholders' equity (deficit)                                     (436,368)                26,680,642
                                                                       --------------               -------------
    Total liabilities and stockholders' equity (deficit)              $   358,264,444              $ 389,075,227
                                                                       ==============               =============
</TABLE>

                 See notes to consolidated financial statements.

                                        9

<PAGE>



                           ORION NETWORK SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                   Year ended December 31,
                                                    -------------------------------------------------------
                                                           1996               1995              1994
                                                   ------------------   ---------------   ------------------
<S>                                                <C>                 <C>               <C>           
Service revenue                                     $    41,847,292     $    22,283,882   $    3,415,053
Operating expenses:
  Direct                                                  6,024,109          10,485,745        3,503,037
  Sales and marketing                                    11,465,040           8,613,399        5,863,823
  Engineering and technical services                      8,672,943           8,539,644        3,004,144
  General and administrative                             15,089,800          10,072,429        5,058,201
  Depreciation and amortization                          36,948,158          31,403,376        1,716,019
                                                   ------------------   ---------------   ------------------
       Total operating expenses                          78,200,050          69,114,593       19,145,224
                                                   ------------------   ---------------   ------------------

Loss from operations                                    (36,352,758)        (46,830,711)     (15,730,171)

Other expense (income):
  Interest income                                        (2,313,842)         (1,924,822)        (413,435)
  Interest expense                                       27,764,126          24,738,446           60,559
  Other                                                      22,018           3,359,853          (54,737)
                                                   ------------------   ---------------   ------------------
       Total other expense (income)                      25,472,302          26,173,477         (407,613)
                                                   ------------------   ---------------   ------------------

Loss before minority interest                           (61,825,060)        (73,004,188)     (15,322,558)

Limited Partners' and minority interest in
  the net loss of Orion Atlantic and other
  consolidated entities                                  34,629,650          46,089,010        7,357,640
                                                   ------------------   ---------------   ------------------

Net loss                                                (27,195,410)        (26,915,178)      (7,964,918)

Preferred stock dividend, net of forfeitures              1,369,665           1,329,007          626,400
                                                   ------------------   ---------------   ------------------

Net loss attributable to common stockholders        $   (28,565,075)    $   (28,244,185)  $   (8,591,318)
                                                   ==================   ===============   ==================

Net loss per common share                           $         (2.62)    $        (3.07)   $        (0.86)
                                                   ==================   ===============   ==================

Weighted average common shares outstanding               10,951,823           9,103,505        9,272,166
                                                   ==================   ===============   ==================
</TABLE>

                 See notes to consolidated financial statements.


                                       10
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                     Common Stock
                                            ------------------------------  Capital in                        Total
                                               Number of                     Excess of     Accumulated    Stockholders'
                                                Shares             Amount    Par Value       Deficit     Equity (Deficit)
                                            --------------  -------------- -------------  -------------  ----------------

<S>                                             <C>         <C>            <C>            <C>            <C>            
Balance at December 31, 1993                    6,583,994   $      65,840  $  30,414,374  $ (22,080,628) $     8,399,586
  Issuance of common stock                        782,503           7,825      6,326,028             --        6,333,853
  Exercise of stock options                        31,967             319        208,131             --          208,450
  Conversion of common stock to
     redeemable preferred stock                  (352,941)         (3,529)    (2,996,471)            --       (3,000,000)
                                                            
  Preferred stock dividend, net of   
     forfeitures                                       --              --             --       (626,400)        (626,400)
  Net loss for 1994                                    --              --             --     (7,964,918)      (7,964,918)
                                            --------------  -------------- -------------  -------------  ----------------

Balance at December 31, 1994                    7,045,523          70,455     33,952,062    (30,671,946)       3,350,571
  Issuance of common stock                      4,002,941          40,030     50,960,330             --       51,000,360
  Exercise of stock options and warrants           67,501             675        573,221             --          573,896
  Preferred stock dividend, net of  
     forfeitures                                       --              --             --     (1,329,007)      (1,329,007)
  Net loss for 1995                                    --              --             --    (26,915,178)     (26,915,178)
                                            --------------  -------------- -------------  -------------  ----------------

Balance at December 31, 1995                   11,115,965         111,160     85,485,613    (58,916,131)      26,680,642
  Conversion of preferred stock to
      common stock                                 91,071             911        804,034             --          804,945

  Issuance of stock warrants                           --              --        300,000             --          300,000
  Exercise of stock options and warrants           37,629             376        342,744             --          343,120
  Preferred stock dividend, net of                     --              --             --     (1,369,665)      (1,369,665)
       forfeitures
  Net loss for 1996                                    --              --             --    (27,195,410)     (27,195,410)
                                            --------------  -------------- -------------  -------------  ----------------

Balance at December 31, 1996                   11,244,665   $     112,447  $  86,932,391  $ (87,481,206) $      (436,368)
                                            ==============  ============== =============  =============  ================
</TABLE>

                 See notes to consolidated financial statements.


                                       11
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                 Year ended December 31,
                                                               -------------------------------------------------------------
                                                                    1996                  1995                  1994
                                                               ----------------      ----------------      -----------------
<S>                                                            <C>                   <C>                   <C>             
Operating activities
Net loss                                                       $   (27,195,410)      $   (26,915,178)      $    (7,964,918)
Adjustments to reconcile net loss to net cash used in
  operating activities:
     Depreciation and amortization                                  36,948,158            31,403,376             1,713,117
     Amortization of deferred financing costs                        2,130,588             2,130,588                    --
     Provision for bad debts                                           919,453               277,529                    --
     Satellite incentives and accrued interest                       2,371,506             5,185,834                    --
     Limited Partners' and minority interest in the net loss
     of  Orion Atlantic and other consolidated entities            (34,629,650)          (46,089,010)           (7,352,704)
     Gain on sale of assets                                            (54,738)              (59,301)              (54,737)
     Changes in operating assets and liabilities:
       Accounts receivable                                          (2,203,171)           (4,915,257)             (426,281)
       Accrued interest                                                 50,481              (129,810)                   --
       Prepaid expenses and other current assets                      (336,376)           (3,017,782)              159,030
       Other assets                                                    (69,708)             (519,773)              321,443
       Accounts payable and accrued liabilities                     (3,621,847)            7,327,377               535,092
       Other current liabilities                                     3,296,913             3,670,988                    --
       Interest payable                                                578,803              (885,106)                   --
                                                               ----------------      ----------------      -----------------
         Net cash used in operating activities                     (21,814,998)          (32,535,525)          (13,069,958)

Investing activities
Capital expenditures                                               (12,625,444)           (8,549,799)           (3,432,286)
Deferred revenue, net                                                9,900,000                    --                    --
Satellite construction costs                                        (3,750,231)             (510,613)          (47,670,720)
Refund from satellite manufacturer                                          --             2,750,000                    --
FCC license costs                                                      (37,865)             (558,817)              (96,030)
                                                               ----------------      ----------------      -----------------
         Net cash used in investing activities                      (6,513,540)           (6,869,229)          (51,199,036)

Financing activities
Limited Partners capital contributions                              30,135,000             7,600,000             4,000,000
Redemption of limited partner interest                                      --            (4,450,000)                   --
Expenditures on debt and equity financing costs                     (2,265,291)                   --              (409,181)
Proceeds from issuance of redeemable preferred stock                        --             4,483,001            10,928,293
Proceeds from issuance of common stock and
  subscriptions, net of issuance costs                                 343,120            51,974,436             6,542,303
PPU borrowings                                                              --             2,275,000             4,375,000
Proceeds from issuance of notes payable                                     --               551,850             8,136,191
Proceeds from senior notes payable to banks                                 --            18,367,134            36,685,505
Payments of senior notes payable to banks                          (22,768,340)          (12,468,049)                   --
Payments of notes payable                                           (5,033,941)           (1,916,966)                   --
Payments on capital lease obligations                                 (755,995)             (576,727)             (252,823)
Capacity and other liabilities                                      15,750,207            17,483,733             2,101,168
Distributions to joint venture minority interest                            --               (25,904)              (22,873)
                                                               ----------------      ----------------      -----------------
         Net cash provided by financing activities                  15,404,760            83,297,508            72,083,583
                                                               ----------------      ----------------      -----------------
Net (decrease) increase in cash and cash equivalents               (12,923,778)           43,892,754             7,814,589
Cash and cash equivalents at beginning of period                    55,111,585            11,218,831             3,404,242
                                                               ----------------      ----------------      -----------------
Cash and cash equivalents at end of period                     $    42,187,807       $    55,111,585       $    11,218,831
                                                               ================      ================      =================
</TABLE>


                 See notes to consolidated financial statements.

                                       12
<PAGE>
                           ORION NETWORK SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION

     Orion  Network  Systems,  Inc.  (Orion)  was  incorporated  in the State of
Delaware  on  October  26,  1982  (inception)  under  the name  Orion  Satellite
Corporation,  and in January 1988,  changed its name to Orion  Network  Systems,
Inc. Orion has developed and operates an international satellite  communications
system for use in private  communications  networks to multinational  businesses
and  transmission  capacity for video and other program  distribution  services.
Orion has been  financed by private and public  equity and debt from  individual
and corporate  investors.  Orion's first  satellite  (Orion 1) was  successfully
launched on November 29, 1994.  Orion took  delivery of the Orion 1 satellite on
January 20,  1995.  In August 1995,  the Company  completed  its initial  public
offering of common stock by selling  4,000,000  common  shares at $14 per share.
Proceeds to the Company, net of underwriting discount,  aggregated approximately
$52.25 million.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION POLICY

     The consolidated  financial  statements  include the accounts of Orion, its
two wholly-owned  subsidiaries  OrionNet,  Inc. (OrionNet) and OrionSat, its 83%
owned subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific), the
Orion  Financial  Partnership,  in which Orion holds a 50%  interest,  and Orion
Atlantic,  in which Orion  holds,  at December  31,  1996,  a 41 2/3%  ownership
interest.  Management  control and direction of Orion  Atlantic by OrionSat is a
requirement  of the FCC in order  for Orion  Atlantic  to  continue  to hold the
license  authority  received in June 1991.  OrionSat,  as the general partner of
Orion Atlantic, exercises such control through the provisions of the partnership
agreement.  The amount  reflected  in the balance  sheet as  "Limited  Partners'
interest in Orion Atlantic"  represents  amounts invested by entities other than
Orion (net of syndication  costs related to the investments)  adjusted for those
Limited  Partners'  share of operating  results.  All  significant  intercompany
accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

     Orion  considers  all highly  liquid  investments  with a maturity of three
months or less when purchased to be cash equivalents.  Cash and cash equivalents
includes cash in banks and short term investments as follows:


                                              DECEMBER 31,
                                     ----------------------------------
                                          1996             1995
                                     --------------   -----------------
Cash.......................          $    2,627,477   $     3,091,277
Money market funds.........              14,213,484         6,018,925
Commercial paper...........              25,346,846        34,612,175
FHLMC discount notes.......                      --        11,389,208
                                     --------------   -----------------
                                     $   42,187,807   $    55,111,585
                                     ==============   =================

The commercial paper held at December 31, 1996 matures between January and March
1997.

PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost.  Depreciation  and amortization
are calculated using the straight-line  method over their estimated useful lives
as follows:

      Satellite and related equipment..............    10.5 years
      Telecommunications equipment.................    2-7 years
      Furniture and computer equipment.............    2-7 years

     Costs  incurred  in  connection  with  the   construction   and  successful
deployment of the Orion 1 satellite and related equipment are capitalized.  Such
costs include direct  contract cost,  allocated  indirect  costs,  launch costs,
launch  insurance,  construction  period  interest  and  the  present  value  of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite  construction in progress".  Orion began  depreciating the Orion 1
satellite over its estimated  useful life  commencing on the date of operational
delivery in orbit (January 20, 1995).

     In March 1995,  the  Financial  Accounting  Standards  Board (FASB)  issued
Statement No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed Of",  which requires  impairment  losses to be
recorded on long-lived  assets used in operations  when indicators of impairment
are present and the  undiscounted  cash flows estimated to be generated by those
assets  are less  than the  assets'  carrying  amount.  Statement  No.  121 also
addresses the accounting for long-lived  assets that are expected to be disposed
of. The effect of adoption was not material.

                                       13
<PAGE>




                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED FINANCING COSTS

     Deferred  financing  costs  related to obtaining  debt and Orion's share of
equity  financing for Orion  Atlantic are amortized  over the period the debt is
expected to be  outstanding.  Accumulated  amortization at December 31, 1996 and
1995 was $9,122,000 and $6,991,000,  respectively.  Amortization through January
1995  was  capitalized  as  part  of  the  cost  of  the  satellite.   Costs  of
approximately  $3.4 million  relating to a debt  offering  that was postponed in
November 1995 have been charged to "Other" expense.

OTHER ASSETS

     Other  assets  consist   principally  of  FCC  license  application  costs,
organization  costs and  goodwill.  The  Company  began  amortizing  FCC license
application  costs related to Orion 1 in January 1995 over the estimated  useful
life of the satellite.  Organization  costs and goodwill are amortized over five
and ten years  respectively.  Accumulated  amortization at December 31, 1996 and
1995 was $3,150,000 and $3,069,000, respectively.

INTEREST RATE MODIFICATION AGREEMENTS

     Orion  may,  from  time to  time,  enter  into  interest-rate  swap and cap
agreements to modify the interest characteristics of its outstanding debt from a
floating to a fixed-rate basis. These agreements involve the receipt of floating
rate amounts in an exchange for  fixed-rate  interest  payments over the life of
the  agreement  without an  exchange of the  underlying  principal  amount.  The
differential  to be paid or  received is accrued as  interest  rates  change and
recognized as an adjustment to interest expense related to the debt. The related
amount  payable to or  receivable  from  counterparties  is included in interest
payable.  The fair  values  of the swap  agreements  are not  recognized  in the
financial statements.

REVENUE RECOGNITION

     Orion's  revenue  results  from  providing  telecommunications  and related
services.  Revenue is recognized  as earned in the period in which  services are
provided.

     The following  summarizes the Company's  domestic and foreign  revenues for
the year ended December 31, 1996 and 1995:

                                               Year ended December 31,
                                           -------------------------------
                                              1996             1995
                                           -------------- ----------------
Revenues from unaffiliated customers
    United States.......................   $  21,261,980  $     8,528,736
    Europe..............................      14,571,979        8,056,146
Revenues from related parties...........       6,013,333        5,699,000
                                           -------------- ----------------
Total services revenue..................   $  41,847,292  $    22,283,882
                                           ============== ================

                                       14
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

     The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and  liabilities  using enacted tax rates that will be in effect
when the difference is expected to reverse.

     Following is a summary of the  components  of the net deferred tax asset at
December 31, 1996 and 1995 (in thousands):

                                                    December 31,
                                                1996             1995
                                         ----------------   ----------------
Tax benefit of temporary differences:
Net operating loss carryforward           $        29,535   $        19,463
Orion Atlantic losses..........                       182             1,237
Other..........................                     2,427             1,056
                                         ----------------   ----------------

Total..........................                    32,144            21,756
Valuation allowance............                   (32,144)          (21,756)
                                         ----------------   ----------------
Net deferred tax asset.........           $            --   $            --
                                         ================   ================

     At  December  31,  1996,  Orion  has  approximately  $77.7  million  in net
operating  loss  carryforwards  which expire at varying  dates from 2004 through
2011.  The use of these loss  carryforwards  may be limited  under the  Internal
Revenue  Code as a result of  ownership  changes  experienced  by Orion.  Due to
uncertainty  regarding its ability to realize the benefits of such net operating
loss  carryforwards,  the Company has established a valuation  allowance for the
full amount of its net operating loss carryforwards.

NET LOSS PER COMMON SHARE

     Net loss per common share is based on the weighted average number of common
shares  outstanding  during the  period.  Pursuant  to the  requirements  of the
Securities  and Exchange  Commission,  common  stock  issued and stock  issuable
relating to convertible preferred stock, warrants and options granted within one
year of filing the  registration  statement  relating to the  Company's  initial
public  offering of common  stock were  treated as  outstanding  for all periods
prior to the second quarter of 1995.

STATEMENTS OF CASH FLOWS

Non-cash   investing  and  financing   activities  and  supplemental  cash  flow
information includes:
<TABLE>
<CAPTION>

                                                                           December 31, 1996
                                                          --------------------------------------------------
                                                                1996             1995              1994
                                                          ---------------   ---------------  ---------------
<S>                                                      <C>               <C>              <C>            
Satellite construction costs financed by notes payable    $            --   $            --  $     7,862,050
Conversion of common stock to redeemable
  preferred stock....................................
Property and equipment financed by capital leases....             482,452         2,850,766           94,323
Preferred stock dividend, net of forfeitures.........           1,369,665         1,329,007          626,400
Conversion of preferred stock to common stock........             804,945             9,000               --
Premium on satellite due to redemption of L.P. interest                --         3,066,925               --
Redemption of STET interest with notes payable.......                  --         8,000,000               --
Reduction in amount due to satellite manufacturer....                  --           485,799               --
Satellite incentive obligation capitalized...........                  --        14,816,406               --
Interest paid during the year, net of amounts        
capitalized..........................................          20,619,316        11,312,875           45,051
</TABLE>

USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

                                       15
<PAGE>



                          ORION NETWORK SYSTEMS, INC. -
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3. ORION ATLANTIC

     Orion  Atlantic  is  a  Delaware  limited  partnership  formed  to  provide
international private communications networks and basic transponder capacity and
capacity  services  (including  ancillary  ground  services) to  businesses  and
institutions  with  trans-Atlantic  and  intra-European  needs. The business was
organized by OrionSat,  the general  partner of Orion  Atlantic.  The  principal
purposes  of  Orion  Atlantic  were to  finance  the  construction,  launch  and
operation of up to two  telecommunications  satellites in  geosynchronous  orbit
over the  Atlantic  Ocean and to  establish  a  multinational  sales and service
organization.  Eight  international  corporations,  including Orion,  invested a
total of $90  million in equity as limited  partners  in Orion  Atlantic.  Orion
Atlantic also has a credit  facility  which  provided up to $251 million for the
first  satellite  from a  syndicate  of major  international  banks led by Chase
Manhattan  Bank,  N.A.  In  addition to their  equity  investments,  the Limited
Partners have agreed to lease capacity on the satellites up to an aggregate $155
million and have entered into  additional  contingent  capacity lease  contracts
("contingent call") up to an aggregate $271 million, as support for repayment of
the senior debt. The firm capacity leases and contingent  calls are payable over
a  seven-year  period after the first  satellite  is placed in service.  In July
1995,  January and July 1996 the Limited  Partners  (excluding the Company) paid
$7.6 million,  $18.0 million and $12.1  million,  respectively,  pursuant to the
contingent calls.

     Satellite  Construction  Contract  --The  fixed  base  price  of  Orion  1,
excluding  obligations  relating  to  satellite  performance,   aggregated  $227
million.  In addition to the fixed base price, the contract requires payments in
lieu of a further contract price increase, aggregating approximately $44 million
through  2006.  Such  payments  are due,  generally,  if 24 out of 34  satellite
transponders  are  operating  satisfactorily.  Shortly  after  acceptance of the
satellite in January 1995, the Company filed a warranty claim with the satellite
manufacturer  relating to one transponder  that was not performing in accordance
with contract specifications. In August 1995, Orion Atlantic received a one time
refund of $2.75  million  which was  applied as a  mandatory  prepayment  to the
senior notes payable - banks.

     The  Company  believes  that  since  Orion  1  is  properly   deployed  and
operational,  based upon industry data and experience, payment of the obligation
mentioned  above is highly  probable and the Company has capitalized the present
value of this obligation of  approximately  $14.8 million as part of the cost of
the  satellite.  Payment of amounts due under this  obligation are delayed until
payment is permitted under the senior notes payable -- banks.  The present value
was  estimated by  discounting  the  obligation  at 14% over the expected  term,
assuming  payment of the incentives  begins upon  expiration of the senior notes
payable -- banks in 2002.

     Partnership and Limited Partners -- OrionSat has the primary responsibility
for the  control,  management  and  operations  of  Orion  Atlantic.  Under  the
partnership  agreement,  the limited  partners  have  rights of  approval  for a
limited  number  of  matters,  e.g.,  terms  for  acceptance  of  new  partners,
significant  budget  modifications,  and certain  borrowings.  The financing and
legal structure of Orion Atlantic restricts the use of partnership  resources to
the purposes of constructing, launching and operating the satellite system.

     Condensed balance sheet information for Orion Atlantic at December 31, 1996
and 1995 is as follows:



                                                       December 31,
                                             ----------------------------------
                                                   1996             1995
                                             ---------------   ----------------
Assets
Current assets...........................    $    14,959,986   $    14,085,169
Property and equipment, net..............        285,006,166       303,889,894
Deferred financing costs and other.......         12,773,951        16,051,517
                                             ---------------   ----------------
     Total assets........................    $   312,740,103   $   334,026,580
                                             ===============   ================

Liabilities and partnership capital
Current liabilities......................    $    59,139,777   $    52,883,250
Long-term debt and other liabilities.....        274,732,228       284,110,104
Partnership capital subject to redemption                 --                --
Partnership (deficit) capital............        (19,081,902)        1,533,226
Less:  Orion Network Systems, Inc. note..         (2,050,000)       (4,500,000)
                                             ---------------   ----------------
     Total liabilities and partnership    
         capital.........................    $   312,740,103   $   334,026,580
                                             ================  ===============

                                       16
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.  ORION ATLANTIC (CONTINUED)

         Redemption of STET  Partnership  Interest;  Issuance of New Interest to
Orion.  -- In November  1995 Orion  Atlantic  redeemed  the limited  partnership
interest held by STET (the "STET  Redemption").  Such  redemption  was for $11.5
million,  including  $3.5  million of cash and $8.0  million in 12%,  promissory
notes due through 1997.  STET's firm and  contingent  capacity  leases remain in
place  until  released by the Banks  under the Orion 1 Credit  Facility.  STET's
existing  contractual  arrangements  with Orion Atlantic have been modified in a
number of respects,  including (i) a reduction of approximately  $3.5 million in
amounts due by Orion Atlantic to Telespazio S.p.A., an affiliate of STET, over a
ten-year period under contracts relating to the construction of Orion 2, back-up
tracking,  telemetry  and  command  services  through  a  facility  in Italy and
engineering consulting services, (ii) the establishment of ground operations and
distribution  agreements between Orion Atlantic and Telecom Italia, a subsidiary
of STET,  relating to Italy,  and the  granting to Telecom  Italia of  exclusive
marketing rights relating to Italy for a period ending December 1998 conditioned
upon  Telecom  Italia  achieving  certain  sales  quotas,  and  (iii)  canceling
exclusive ground operations and sales  representation  agreements  between Orion
Atlantic and STET (or its affiliates) relating to Eastern Europe.

     Orion  Atlantic  funded  the  STET  Redemption  by  selling  a new  limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12% promissory  notes due through 1997).  In connection with the
STET  redemption,  Orion agreed to indemnify  Telecom  Italia for payments which
were made in July 1995 of $950,000  and which would be made in the future  under
its firm and contingent capacity agreements with Orion Atlantic and posted a $10
million  letter of credit to support such  indemnity.  The Company has accounted
for this transaction as an acquisition of a minority  interest and, as a result,
approximately  $3.1  million  was  allocated  to the cost of the  satellite  and
related equipment.

     During 1995,  Orion Atlantic  entered into  agreements with certain Limited
Partners (including the Company) under which the participating  Limited Partners
would  voluntarily  give up their  rights to receive  capacity  under their firm
capacity  agreements  through January 1996. The  participating  Limited Partners
would  continue to make  payments for such  capacity but would have the right to
receive  refunds from Orion Atlantic out of cash available after operating costs
and  payments  under the Credit  Facility.  Through  December 31, 1996 and 1995,
Orion Atlantic has received $27.7 million and $14.1 million (excluding  payments
from the Company) under the firm capacity  agreements  subject to refund,  which
amounts are  included in "Other  liabilities."  In  addition,  services  revenue
included  $6.0 million and $5.7  million in 1996 and 1995 from Limited  Partners
pursuant to the firm capacity commitments, not subject to refund.

4. COMMITMENTS AND CONTINGENCIES

     Obligations with Respect to Orion Atlantic -- Orion has certain significant
obligations to Orion Atlantic and the Limited  Partners,  including  commitments
under satellite  capacity  agreements  between Orion and Orion  Atlantic,  under
which Orion will be liable to pay Orion Atlantic  approximately $2.5 million per
year for seven years for satellite capacity and is contingently liable for up to
an  additional  $4.3  million per year for up to seven  years if Orion  Atlantic
experiences  cash flow deficits not outstanding at December 1997 commencing when
Orion Atlantic's first satellite begins commercial operations; and reimbursement
(jointly and severally  with  OrionSat)  with respect to a $10 million letter of
credit  provided by OrionSat to a limited  partner,  which is secured by 259,515
shares of Orion's  common  stock held in treasury  and cash  distributions  that
Orion and OrionSat may receive  with respect to their  partnership  interests in
Orion Atlantic.

     Orion 1 satellite  -- In November  1995, a portion of the Orion 1 satellite
experienced  an anomaly  that  resulted  in a  temporary  service  interruption,
lasting  approximately two hours, in the dedicated capacity serving the European
portion of Orion Atlantic's services. The nine affected transponders account for
a majority of Orion Atlantic's  present  revenues.  Full service to all affected
customers  was  restored  using  redundant  equipment  on the  satellite.  Orion
Atlantic  believes,  based on the data and the Telesat Report (issued by Telesat
Canada,  independent  engineering  consultants  dated November 14, 1995),  that,
because  the  redundant  component  is  functioning  fully  in  accordance  with
specifications  and the performance  record of similar components is strong, the
anomalous  behavior  is  unlikely  to affect  the  expected  performance  of the
satellite over its useful life.  Furthermore,  there has been no effect on Orion
Atlantic's ability to provide services to customers.  However, in the event that
the currently  operating component fails, Orion 1 would experience a significant
loss of usable capacity.  In such event,  while Orion Atlantic would be entitled
to insurance  proceeds of approximately  $50 million and could lease replacement
capacity  and function as a reseller  with respect to such  capacity (at reduced
levels of  profitability),  the loss of capacity  would have a material  adverse
effect on Orion and on Orion Atlantic.

     Orion 2 satellite -- July 1996,  the Company  signed a contract  with Matra
Marconi Space for the  construction and launch of Orion 2 (which was amended and
restated in January 1997) and in February 1997  commenced  construction  of that
satellite.  The contract provides for delivery in orbit of Orion 2 by June 1999,
for a firm fixed price of $201 million, excluding launch insurance. Orion 2 will
expand the Company's  European  coverage and extend  coverage to portions of the
Commonwealth of Independent States, Latin American and the Middle East.

     Orion  3  --  In  January  1997,  the  Company  entered  into  a  satellite
procurement  contract with Hughes Space for the construction and launch of Orion
3,  construction of which commenced in December 1996. The contract  provides for
delivery  in orbit of Orion 3 by December  1998,  for a firm fixed price of $208
million,  excluding launch insurance. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan,  Korea,  Southeast Asia,  Australia,  New
Zealand, Eastern Russia and Hawaii.

                                       17
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4. COMMITMENTS AND CONTINGENCIES (CONTINUED)

     In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"),
a Korean  communications  company,  under which DACOM will lease eight dedicated
transponders on Orion 3 for 13 years, in return for  approximately  $89 million,
which is payable over a period from December  1996 through six months  following
the lease commencement date for the transponders (which is scheduled to occur by
January  1999).  DACOM is to  deposit  funds  with  Orion in  accordance  with a
milestone  schedule.  In December 1996, Orion received a $10 million deposit and
such amount is included in "Other  liabilities".  Orion  maintains a $10 million
letter of credit which increases as DACOM makes additional  deposits.  DACOM has
the right to terminate  the  contract at any time prior to March 31, 1997,  upon
which termination  Orion would be entitled to retain all deposited funds.  Prior
to launch, payments will be held in escrow and are subject to refund pending the
successful launch and commencement of commercial operation of Orion 3.

     Eutelsat  Lease -- In January 1993,  Orion  Atlantic  entered into a lease,
which expired in December  1994,  with one of its limited  partners  under which
Orion Atlantic leased one-half of a transponder on a EUTELSAT  satellite for use
in providing private network services prior to the operational delivery of Orion
1. The lease  required  quarterly  payments of $481,000  of which  $855,000  was
deferred by the limited  partner until March 1995. Rent under this lease totaled
$1.9 million in 1994.

     Litigation -- In October 1995, Skydata  Corporation  ("Skydata"),  a former
contractor,  filed suit against Orion Atlantic,  Orion Satellite Corporation and
Orion,  in the United States  District Court for the Middle District of Florida,
claiming  that certain  Orion  Atlantic  operations  using frame relay  switches
infringe  a Skydata  patent.  Skydata's  suit  sought  damages  in excess of $10
million and asked that any damages  assessed be trebled.  On December  11, 1995,
the Orion  parties  filed a motion to dismiss the lawsuit on the grounds of lack
of jurisdiction and violation of a mandatory arbitration agreement. In addition,
on December 19, 1995, the Orion parties filed a Demand for  Arbitration  against
Skydata  with  the  American  Arbitration   Association  in  Atlanta,   Georgia,
requesting   damages  in  excess  of  $100,000   for  breach  of  contract   and
declarations,   among  other  things,  that  Orion  and  Orion  Atlantic  own  a
royalty-free license to the patent, that the patent is invalid and unenforceable
and that Orion and Orion Atlantic have not infringed on the patent.  On March 5,
1996, the court granted the Company's motion to dismiss the lawsuit on the basis
that Skydata's claims are subject to arbitration. Skydata appealed the dismissal
to the United  States  Court of Appeals for the Federal  Circuit.  Skydata  also
filed a counterclaim  in the  arbitration  proceedings  asserting a claim for $2
million damages as a result of the conduct of Orion and its  affiliates.  On May
15,  1996,  the  arbitrator  granted the Orion  parties'  request for an initial
hearing on claims relating to the Orion parties' rights to the patent, including
the co-ownership  claim and other contractual  claims.  This initial hearing was
scheduled to take place in November 1996. On November 9, 1996, Orion and Skydata
executed a letter to settle in full the pending  litigation and arbitration.  As
part of the  settlement,  the  parties  are to release all claims by either side
relating in any way to the patent and/or the pending litigation and arbitration.
In  addition,  Skydata is to grant Orion (and its  affiliates)  an  unrestricted
paid-up  license to make,  have made,  use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata  $437,000 over a period of two years as part of the settlement.  The
parties are in the process of documenting the final terms in a formal settlement
agreement.

     While Orion is party to regulatory  proceedings incident to the business of
Orion,  there  are no  other  material  legal  proceedings  pending  or,  to the
knowledge of management, threatened against Orion or its subsidiaries.

     Other -- Orion has entered into operating  leases,  principally  for office
space.  Rent expense was $915,000,  $735,000 and $668,000 during the years ended
December 31, 1996, 1995, and 1994, respectively.

     Future minimum lease payments are as follows:

                    1997......................  $  1,073,582 
                    1998......................       969,302 
                    1999......................       989,640 
                    2000......................        13,694 
                                                ------------
                                                $  3,046,218 
                                                ============


                                       18
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5. LONG-TERM DEBT

See Note 9 for  discussion  of  significant  financing  transactions  that  were
consummated on January 31, 1997.

Long-term debt at December 31, 1996 and 1995, consists of the following:


                                                     December 31,
                                            -----------------------------
                                                1996            1995
                                            ------------   --------------

Senior notes payable - banks............    $207,714,842   $  230,483,182
Note payable - TT&C Facility............       6,956,624        8,774,266
Satellite incentive obligation..........      22,373,746       20,002,240
Notes payable - STET....................       5,550,000        8,000,000
Note payable - Limited Partners.........       8,050,000        8,050,000
Other ..................................       2,566,687        3,966,708
                                            ------------   --------------

Total long-term debt....................     253,211,899      279,276,396
Less: current portion...................      34,975,060       28,607,110
                                            ------------   --------------
Long-term debt less current portion.....    $218,236,839   $  250,669,286
                                            ============   ==============



Total interest (including commitment fees and amortization of deferred financing
costs)  incurred for the years ended December 31, 1996, 1995 and 1994 was $27.8,
$26.0,  and  $27.0  million,  respectively.  Substantially  all of the  interest
incurred in 1994 was capitalized and $1.3 million was capitalized in 1995.

     Aggregate annual  maturities of long-term debt consist of the following (in
thousands):

                    1997..................      $        34,964 
                    1998..................               34,422 
                    1999..................               46,914 
                    2000..................               43,619 
                    2001..................               47,317 
                    Thereafter............               45,976 
                                                --------------- 
                                                $       253,212 
                                                =============== 
                    
     Senior Notes Payable to Banks -- In December 1991,  OrionSat,  on behalf of
Orion  Atlantic,  executed a credit  agreement  for up to $400 million of senior
debt from an international banking syndicate.  Amounts advanced under the credit
facility  are  secured  by the assets of Orion  Atlantic  and are due over seven
years in graduated  installments  beginning July 31, 1995. The credit  agreement
prohibits  the  extension  of credit by Orion  Atlantic to any  affiliate of the
partnership,  as defined.  Accordingly,  Orion  Atlantic may not loan or advance
funds to the Company or its  affiliates.  The credit  agreement  also  restricts
distributions  to the partners.  At December 31, 1996, none of Orion  Atlantic's
capital was  available  for  distribution.  The credit  facility has a number of
other  customary  covenants and  requirements,  including the Banks' approval of
significant  changes to the  construction  contract  and  increases  in budgeted
costs.  The Banks also have full  recourse to OrionSat as general  partner,  and
Orion has pledged its investment in the common stock of OrionSat and its limited
partner ownership interest to the Banks.

     Amounts  outstanding  under the credit facility bear interest at 1.75% over
the  LIBOR  (7.6% at  December  31,  1996).  Orion  Atlantic  has  entered  into
agreements with Chase Manhattan Bank, N.A. ( "Chase" ) for interest rate hedging
arrangements  which fixed the maximum  interest  rate through  November  1995 at
11.54%.  Thereafter  a self  funding  interest  rate cap  agreement  is in place
relating  to a notional  amount  declining  every six months  from $150  million
effective November 30, 1995 to $15.6 million effective March 31, 2001. Under the
terms of the cap  agreement,  when LIBOR equals or exceeds  5.5% Orion  Atlantic
pays Chase a fee equal to 3.3% per annum of the  notional  amount and receives a
payment from Chase in an amount equal to the difference between the actual LIBOR
rate and 5.5% on the notional  amount.  There was an unrealized loss at December
31, 1996 and 1995 of  approximately  $6.4 million and $4.6  million  relating to
this arrangement.

                                       19
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.    LONG TERM DEBT (CONTINUED)

     Note Payable -- TT&C  Facility -- Orion  Atlantic  entered into a financing
arrangement with General Electric  Capital  Corporation  ("GECC") to finance the
Tracking Telemetry and Control ("TT&C") Facility. The TT&C arrangement calls for
a note payable,  the maximum  amount of which is $11 million of which up to $8.9
million is for payment to Lockheed  Martin under the  Satellite  Control  System
Contract,  with the remaining  balance available to be drawn to finance the cost
of launch  insurance  required  for the  benefit of GECC.  In June  1995,  Orion
Atlantic  accepted the TT&C Facility and Orion Atlantic  refinanced $9.3 million
from GECC as a seven-year  term loan,  payable  monthly.  Orion  Atlantic made a
mandatory  prepayment of $1 million in January 1996.  The interest rate is fixed
at 13.5%.

     The TT&C debt is secured by the TT&C Facility, the Satellite Control System
Contract and Orion Atlantic's  leasehold interest in the TT&C Facility land. The
TT&C  financing  agreement  contains  similar  representations,  warranties  and
covenants to those in the senior notes.

     Satellite  incentive  obligation -- The  obligations  relating to satellite
performance  have been  recorded at the present  value  (discounted  at 14%, the
Company's estimated  incremental  borrowing rate for unsecured financing) of the
required  payments  commencing  at the maturity of the senior  notes  payable to
banks and continuing through 2006. Under the terms of the construction contract,
payment of the  obligation  is delayed  until such time as payment is  permitted
under the senior notes payable to banks.

     Notes  Payable  -- STET -- In  connection  with  the STET  Redemption,  the
Company  issued STET $8 million of  promissory  notes which bear interest at 12%
per annum.  Payments are due as follows: $2.5 million plus accrued interest paid
on December  31, 1996;  $3.5  million  plus  accrued  interest on the earlier of
December 31, 1997 or the  refinancing of the senior notes payable to banks;  and
the remaining $2.0 million in monthly  installments of $0.2 million plus accrued
interest beginning January 1997.

     Notes  Payable -- Limited  Partners  -- In 1993,  Orion  Atlantic  received
commitments for Preferred  Participation  Units (PPUs)  aggregating $9.6 million
from  certain  Limited  Partners  (including  $1.5  million  from Orion  Network
Systems) for development of Orion Atlantic's network services business.  Holders
of PPUs earn  interest on aggregate  amounts drawn at the rate of 30% per annum,
of which 6% is paid and the remainder accrued,  but not paid until July 1, 1995,
at which time interest and principal  payments due are subordinated to operating
requirements   and  senior  notes  debt   service  but  are  payable   prior  to
distributions  to  Limited  Partners.  Principal  amounts  drawn are  payable on
February 1, 1999.  Principal  amounts may be prepaid without penalty on or after
January 1, 1996.  Interest payable at December 31, 1996 and 1995 is $5.9 million
and $3.5 million and is included in "Other liabilities".

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

   See Note 9 for  discussion  of  significant  equity  transactions  that  were
consummated on January 31, 1997.

   The  Company has  authorized  1,000,000  shares of $0.01 par value  preferred
stock.

    Redeemable Preferred Stock

     In June  1994,  Orion  issued  11,500  shares  of  Series  A 8%  Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar  preferred stock at $1,000 per
share. Dividends on preferred stock accrue at 8% per year and are payable as and
when declared.  Orion may redeem the preferred stock at the amount invested plus
accrued and unpaid dividends. Upon such a redemption, the preferred stockholders
would  receive a warrant  to  acquire at $8.50 per share the number of shares of
common stock into which the preferred stock was  convertible.  The 11,500 shares
issued are convertible  into 1,352,941 shares of common stock ($8.50 per share).
Upon  conversion  any  accrued and unpaid  dividends  are  forfeited.  Orion may
require  conversion  of the  preferred  stock  beginning in June 1996 if certain
conditions are met. After Orion issued  preferred stock (along with warrants and
options to make an  additional  investment)  in June  1994,  the  Directors  and
affiliates  of Directors  who  purchased  common stock in December  1993 and the
institutions  and other  investors who purchased  common stock in June 1994 each
exercised its right to receive  preferred stock (along with warrants and options
to make an additional  investment)  in exchange for the common stock  previously
acquired  and Orion  issued an  aggregate  of 3,000 shares of Series A Preferred
Stock and related  options for 1,000  shares to such persons and  entities.  The
3,000 shares issued are  convertible  into 352,941 shares of common stock ($8.50
per share).  Through  December  31,  1996,  629 shares of  preferred  stock were
converted into 74,000 shares of common stock. The remaining 13,871 shares issued
are  convertible  into 1,631,882  shares of common stock and the preferred stock
underlying the options are convertible into 25,894 shares of common stock.

                                       20
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)

     The  preferred  stock  has a  liquidation  preference  equal to the  amount
invested plus accrued and unpaid dividends.  Preferred stockholders are entitled
to vote on an  as-converted  basis  and have the right to put the stock to Orion
upon a merger,  change of  control  or sale of  substantially  all assets at the
greater of liquidation  value or fair value. The put expires upon the completion
of a qualified public equity offering, as defined. If the preferred stock is not
previously  redeemed or converted to common stock,  the  preferred  stockholders
also have the right to put the stock to Orion as follows:  33 1/3%  beginning in
June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001.

     In June 1995,  certain  Directors,  affiliates  of  Directors,  and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for  approximately  $4.5 million.  This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred  stock  similar to the Series A
Preferred  Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar  preferred  stock would be convertible at any time with
Common  Stock at a price  within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised.  The Series B Preferred Stock has
rights,  designations  and  preferences  substantially  similar  to those of the
Series A Preferred Stock, and is subject to similar  covenants,  except that the
Series B Preferred  Stock is convertible  into 439,510 shares of Common Stock at
an  initial  price  of  $10.20  per  share,  subject  to  certain  anti-dilution
adjustments,  and  purchases  of Series B Preferred  Stock did not result in the
purchaser receiving any rights to purchase additional  preferred stock.  Through
December 31,  1996,  185 shares of preferred  stock were  converted  into 18,137
shares of common stock.

     Stockholders' Equity

     Stock  Options -- In 1987,  Orion  adopted a stock option plan.  Under this
plan,  as amended,  1,470,588  shares of common  stock are reserved for issuance
upon exercise of options granted.  Shares of common stock may be purchased under
this plan at prices not less than the fair market  value,  as  determined by the
Board of  Directors,  on the date the option is granted.  The Board of Directors
also has granted  nonqualified options to purchase 53,341 shares of common stock
outside the plan described at prices ranging from $5.44 to $12.24 per share.

     Stock options outstanding at December 31:
<TABLE>
<CAPTION>

                                         1996             1995             1994
                                   ---------------   --------------- ----------------
<S>                                <C>       <C>     <C>       <C>   <C>       <C>  
Range of exercise price........... $  8.16 - 12.24   $  5.44 - 12.24 $  5.44 - 12.24
                                   ---------------   --------------- ----------------

Outstanding of  beginning of year          971,469           804,056         871,464
Granted during year...............         122,750           380,069          37,867
Exercised.........................         (37,629)          (60,928)        (31,967)
Canceled .........................        (144,927)         (151,728)        (73,308)
                                   ---------------   --------------- ----------------
Outstanding at end of year........         911,663           971,469         804,056
                                   ===============   =============== ================
</TABLE>

     In November  1993,  stock  options for 95,588  shares of common  stock were
granted to key executives  which may be exercised  only upon the  achievement of
certain business and financial  objectives.  At December 31,1995, the executives
had  earned  the  right  to  exercise  40,441  of  these  options  based  on the
achievement of such objectives. The remaining options were canceled during 1996.

     Stock options vest annually over a one to five-year period. All options are
exercisable  up to seven years from the date of grant.  There are 558,925 shares
available  to be  granted  under the plan.  As of  December  31,  1996 and 1995,
429,265 and  356,226,  respectively,  qualified  and  nonqualified  options were
exercisable.

     In July 1996, the Company  granted,  subject to shareholder  approval,  the
Chairman of the Executive  Committee  100,000 options at $9.83 per share.  These
options vest as follows,  50,000 on January 17, 1997 and 50,000 upon  successful
completion  of either a  refinancing  of the Orion 1  satellite,  financing  for
construction,  launch  and  insurance  for  Orion 2 or  Orion 3 or  completes  a
substantial   acquisition  or  relationship  with  a  strategic  partner.  These
requirements were met in January 1997.

     Non-Employee  Director  Stock  Option  Plan -- In  1996,  Orion  adopted  a
non-employee  director  stock option plan.  Under this plan,  380,000  shares of
common stock are reserved for issuance.  During 1996, there were 190,000 options
granted pursuant to this plan at $8.49 to $12.53 per share.

                                       21
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.    REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)

     The Company has elected to continue to follow  Accounting  Principles Board
Opinion  No.  25,  "Accounting  for Stock  Issued to  Employees"  ("APB 25") and
related  Interpretations  in  accounting  for its  employee  stock  based  award
programs,  because the alternative fair value accounting provided for under FASB
Statement No. 123,  "Accounting for Stock Based Compensation" ("SFAS 123") which
is effective for awards after  January 1, 1996 requires use of option  valuation
models that were not developed for use in valuing employee stock options.  Under
APB 25, when the exercise price of the employee award equals the market price of
the  underlying  stock on the date of grant,  as has been the case  historically
with the Company's awards, no compensation expense is recognized.

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by SFAS 123, and has been  determined  as if the Company had  accounted
for its stock  options under the fair value method of that  statement.  The fair
value  of  these  options  was  estimated  at the  date  of the  grant  using  a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 6.5%,  dividend yield of 0%,  volatility  factor of the expected  market
price of the Company's common stock of 68% and a weighted-average  expected life
of the option of 5.8 years. For purposes of pro forma disclosure,  the estimated
fair value of the options is  amortized  to expense  over the  options'  vesting
period.  For the years ended December 31, 1996 and 1995, the Company's pro forma
net loss and net loss per share  would  have  been  $28.0  million  or $2.68 per
share, and $27.3 million or $3.11 per share, respectively.

     401(k) Profit Sharing Plan -- In September  1996,  Orion amended the 401(k)
profit  sharing  plan.  Under  this  plan,  100,000  shares of common  stock are
reserved  for  issuance  as  the  Company's   discretionary  match  of  employee
contributions.  The Company's matching  contributions may be made in either cash
or in the equivalent amount of the Company's common stock.

     Stock Purchase Plan -- In September  1996,  Orion adopted an employee stock
purchase plan. Under this plan,  500,000 shares of common stock are reserved for
issuance.  Shares of common  stock  purchased  under this plan  through  payroll
deduction.  The purchase price of each share of common stock purchased under the
plan will be 85% of the fair market value of the common stock on the measurement
date.

     Stock Warrants -- In November 1996,  Orion granted 50,000 warrants to DACOM
to  purchase  shares  of  common  stock  at $14  per  share.  The  warrants  are
exercisable for a six month period  beginning six months after the  commencement
date, as defined in the Joint  Investment  Agreement,  and ending one year after
the  commencement  date and will terminate at that time or at any time the Joint
Investment Agreement is terminated. The fair value of the warrant at the date of
issue was $300,000 and was estimated using a Black-Scholes valuation model.

     Stock  warrants  outstanding at December 31, 1996 and 1995 were 142,115 and
553,768, respectively.  Outstanding warrants are exercisable at $9.79 to $14 per
share.  Warrants  totaling  461,653  expired  during the year ended December 31,
1996. In January 1997,  British Aerospace  exercised 86,505 warrants to purchase
shares of common stock at $11.56 per share.

     The holders of  preferred  stock also hold  warrants to purchase  1,631,882
shares of common stock at the conversion  price of such preferred  stock.  These
warrants  do  not  become  exercisable  unless  Orion  exercises  its  right  to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends.

     Reserve for Issuance - The Company has 24,125,482 shares of common stock at
December 31, 1996  reserved for issuance  upon  conversion  of preferred  stock,
exercise of  outstanding  stock  options and  warrants,  and common stock issued
under the stock purchase and 401(k) profit sharing plans.

7. FAIR VALUES OF FINANCIAL INSTRUMENTS

     Other than  amounts  due under the  senior  notes  payable to banks,  Orion
believes  that the carrying  amount  reported in the balance  sheet of its other
financial assets and liabilities  approximates  their fair value. The fair value
of Orion Atlantic's  senior notes payable to banks at December 31, 1996 and 1995
was  estimated to be $214.1  million and $235.1  million  based on the principal
balance  outstanding,  net of the  estimated  fair  value of the  interest  rate
modification agreement,  which approximates an implicit loss of $6.4 million and
$4.6 million,  respectively.  Credit risk exists if the counterparty is not able
to make the required  payments to Orion under these  agreements.  Orion believes
the risk to be remote.

                                       22
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. CONDENSED FINANCIAL INFORMATION OF ORION


     The net assets, credit facilities and other resources of Orion Atlantic are
restricted to the construction and operation of the satellite system.  Presented
below are  condensed  balance  sheets of Orion  (parent  company  only basis) at
December 31, 1996 and 1995 and condensed statements of operations and cash flows
for  the  years  ended   December  31,  1996,   1995  and  1994.   All  material
contingencies,   obligations  and  guarantees  of  Orion  have  been  separately
disclosed in the preceding notes to the financial statements.

             CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                            1996                  1995
                                                                      ---------------        ----------------
<S>                                                                    <C>                   <C>            

ASSETS
Current assets:
  Cash and cash equivalents...................................         $   26,564,562        $    48,797,627
  Receivable from Orion Atlantic..............................                253,088              1,217,169
  Other current assets........................................                766,784                611,391
                                                                      ---------------        ----------------
       Total current assets...................................             27,584,434             50,626,187

Investment in and advances to subsidiaries:
  OrionNet....................................................              8,331,248              5,993,628
  OrionSat....................................................            (35,336,290)           (20,496,009)
  Asia Pacific................................................              1,397,588              1,634,048
  Orion Asia Pacific..........................................              4,324,426                     --
  Orion Atlantic..............................................              9,194,820             10,585,573
Other assets..................................................             10,590,071              6,256,742
                                                                      ---------------        ----------------
       Total assets...........................................         $   26,086,297        $    54,600,169
                                                                      ===============        ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes and interest payable to Orion Atlantic................         $    2,327,427        $     2,482,667
  Accounts payable and accrued liabilities....................              2,828,616              2,361,291
                                                                      ---------------        ----------------
       Total current liabilities..............................              5,156,043              4,843,958
Notes and interest payable to Orion Atlantic..................                     --              2,077,327
Other liabilities.............................................                464,256                640,541
Redeemable preferred stock....................................             20,902,366             20,357,701
Stockholders' equity (deficit)................................               (436,368)            26,680,642
                                                                      ---------------        ----------------
       Total liabilities and stockholders' equity.............         $   26,086,297        $    54,600,169
                                                                      ===============        ================
</TABLE>

                                       23

<PAGE>



                          ORION NETWORK SYSTEMS, INC. -
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.  CONDENSED FINANCIAL INFORMATION OF ORION (CONTINUED)

        CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.

<TABLE>
<CAPTION>

                                                                            Year ended December 31,
                                                         ------------------------------------------------------------
                                                              1996                   1995                  1994
                                                         ---------------       ---------------       ----------------

<S>                                                      <C>                   <C>                   <C>            
Services revenue.....................................    $        34,000       $            --       $            --
Operating expenses and other income:
   General and administrative........................          3,832,286             3,171,305             2,487,201
   Interest income, net..............................         (1,883,719)           (1,834,589)             (243,152)
                                                         ---------------       ---------------       ----------------
   Total operating expenses and other income.........          1,948,567             1,336,716             2,244,049
Equity in net losses of subsidiaries.................         25,280,843            25,578,462             5,720,869
                                                         ---------------       ---------------       ----------------
Net loss.............................................    $   (27,195,410)      $   (26,915,178)      $    (7,964,918)
                                                         ===============       ===============       ================
</TABLE>




        CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.

<TABLE>
<CAPTION>

                                                                            Year ended December 31,
                                                               1996                  1995                  1994
                                                         ----------------      ----------------      ---------------  
<S>                                                      <C>                   <C>                   <C>             
Net cash used in operations......................        $    (4,046,446)      $    (4,107,237)      $    (2,709,307)

Investing activities:............................
  Advances to subsidiaries.......................             (6,918,710)           (3,264,024)           (2,973,264)
  Investment in Orion Atlantic...................             (8,610,000)           (5,400,000)                   --
  Capital expenditures...........................               (504,729)             (597,698)             (771,890)
                                                         ----------------      ----------------      ---------------  
  Net cash used in investing activities..........            (16,033,439)           (9,261,722)           (3,745,154)

Financing activities:
  Proceeds from issuance of redeemable preferred stock                --             4,483,001            10,928,293
  Proceeds from issuance of common stock.........                343,120            51,974,436             6,542,303
  PPU funding....................................                     --              (455,000)             (765,000)
  Repayment of notes payable.....................             (2,496,300)              (37,792)           (5,648,535)
                                                         ----------------      ----------------      ---------------  
  Net cash (used in) provided by financing activities         (2,153,180)           55,964,645            11,057,061
                                                         ----------------      ----------------      ---------------  
  Net (decrease) increase in cash and cash equivalents       (22,233,065)           42,595,686             4,602,600
Cash and cash equivalents at beginning of year...             48,797,627             6,201,941             1,599,341
                                                         ----------------      ----------------      ---------------  
Cash and cash equivalents at end of year.........        $    26,564,562       $    48,797,627       $     6,201,941
                                                         ================      ================      ===============  
</TABLE>


     Basis of presentation -- In these parent  company-only  condensed financial
statements,  Orion's investment in subsidiaries is stated at cost less equity in
the losses of subsidiaries since date of inception or acquisition.



                                       24

<PAGE>



                          ORION NETWORK SYSTEMS, INC. -
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.  SUBSEQUENT EVENTS (UNAUDITED)

     THE EXCHANGE

     On January 31, 1997,  the Company  acquired all of the limited  partnership
interests  which it did not already  own in Orion  Atlantic.  Specifically,  the
Company  acquired the Orion  Atlantic  limited  partnership  interests and other
rights relating thereto held by British Aerospace Communications,  Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette,  and Trans-Atlantic  Satellite,  Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").

     Pursuant to a Section 351 Exchange  Agreement and Plan of  Conversion  (the
"Exchange Agreement"),  the Exchanging Partners exchanged (the "Exchange") their
Orion  Atlantic  limited  partnership  interests  for 123,172  shares of a newly
created class of the Company's  Series C 6%  Cumulative  Convertible  Redeemable
Preferred  Stock (the  "Series C Preferred  Stock").  In  addition,  the Company
acquired  certain rights held by certain of the Exchanging  partners,  including
certain  of the  Exchanging  Partners'  rights to receive  repayment  of various
advances.  The 123,172 shares of Series C Preferred Stock issued in the Exchange
are convertible (as of January 31, 1997) into  approximately 7 million shares of
the  Company's  common  stock.  As a  result  of the  Exchange,  certain  of the
Exchanging Partners became principal stockholders of the Company.

     The Exchange  and the  acquisition  by the Company of the only  outstanding
minority  interest in the Company's  subsidiary  Orion Asia Pacific  Corporation
from  British  Aerospace  Satellite  Investments,  Inc.  on  January 8, 1997 (in
exchange for approximately  86,000 shares of the Company's Common Stock) results
in the Company owning 100% of all its significant subsidiaries and, therefore, a
greatly simplified corporate structure.

     THE MERGER

     The  Exchange  was  conducted  on a  tax-free  basis  by  means of a Merger
(defined  below)  that was  consummated  on January  31,  1997.  Pursuant to the
Exchange Agreement,  Orion Oldco Services, Inc., formerly known as Orion Network
Systems,  Inc. ("Old Orion"),  formed the Company as a new Delaware  corporation
with a certificate of incorporation,  bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement,  the Company formed a wholly owned subsidiary,  Orion Merger
Company, Inc. ("Orion Merger Subsidiary").  Pursuant to an Agreement and Plan of
Merger,  Orion  Merger  Subsidiary  was merged with and into Old Orion,  and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received  stock in the Company with  substantially  identical  rights to the Old
Orion stock they held prior to the effective  time of the Merger.  Following the
Merger,  the Company changed its name from Orion Newco  Services,  Inc. to Orion
Network  Systems,  Inc. and the Company's  wholly owned subsidiary Orion Network
Systems, Inc. changed its name to Orion Oldco Services, Inc.

     THE FINANCINGS

     On January 31, 1997,  the Company  completed a $710  million bond  offering
(the "Offering")  comprised of approximately  $445 million of Senior Note Units,
each of which  consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of common stock, par value $ .01 per share
("Common  Stock") of the Company (a "Senior Note  Warrant"),  and  approximately
$265.4  million of Senior  Discount  Note Units,  each of which  consists of one
12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with
the Senior  Notes,  the  "Notes") and one Warrant to purchase  0.6628  shares of
Common Stock of the Company (a "Senior Discount Note Warrant," and together with
the Senior Note Warrants, the "Warrants").  Interest on the Senior Notes will be
payable semi-annually in cash on January 15 and July 15 of each year, commencing
July 15, 1997.  The Senior  Discount  Notes will not pay cash interest  prior to
January 15, 2002.  Thereafter,  cash interest  will accrue until  maturity at an
annual  rate of 12.5%  payable  semi-annually  on January 15 and July 15 of each
year, commencing July 15, 2002. The exercise price for the Warrants is $ .01 per
share of Common Stock of the Company.  The shares of Common Stock of the Company
initially issuable upon exercise of the Warrants represent  approximately  2.62%
of the  outstanding  Common Stock of the Company on a fully  diluted basis as of
January 31, 1997.

     The net  proceeds of the Offering to the Company  were  approximately  $684
million.  Other than $134  million  placed in a pledged  account to pre-fund the
first six  interest  payments on the Senior  Notes,  the net  proceeds  from the
Offering  were used by the Company to repay the Orion 1 credit  facility and may
be used to build and launch  additional  satellites,  including  the Orion 2 and
Orion 3 satellites.

     On January 31, 1997,  the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors,  British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra  Marconi Space")  purchased $50 million and $10
million  of  the  Convertible  Debentures,   respectively   (collectively,   the
"Convertible  Debenture  Investments,"  and  together  with  the  Offering,  the
"Financings").  The  Convertible  Debentures  will mature in 2012, and will bear
interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely
in common stock of the Company.  The Convertible  Debentures are subordinated to
all other indebtedness of the Company, including the Notes.

                                       25
<PAGE>
   
BUSINESS AND OWNERSHIP   


     As a result of the transactions as described above,  Orion Network Systems,
Inc.  is a  holding  company  with  no  assets  or  operations  other  than  its
investments  in its  subsidiaries.  Through  the  operations  of  the  following
subsidiaries ("Subsidiary Guarantors"),  the Company's principal business is the
provision of satellite-based communications services:

                                             Jurisdiction of
                                             organization or
Name                                          Incorporation
----                                         ----------------

Asia Pacific Space and
Communications, Ltd.                              Delaware

International Private
Satellite Partners, L.P.                          Delaware

Orion Asia Pacific
Corporation                                       Delaware

Orion Atlantic Europe, Inc.                       Delaware

OrionNet Finance
Corporation                                       Delaware

OrionNet, Inc.                                    Delaware

Orion  Satellite         
Corporation                                       Delaware

Teleport Europe GmbH                              Federal Republic of Germany

     Each of the Subsidary Guarantors is a wholly (100%) owned subsidiary of the
Company.  The  Subsidiary  Gurarantors  comprise  all of the direct and indirect
subsidiaries of the Company (other thant inconsequential subsidiaries).

     Separate  financial  statements  of  the  Subsidiary   Guarantors  are  not
presented  because (a) such  Subsidiary  Guarantors  have jointly and  severally
guaranteed  the  Notes  on a full and  unconditional  basis,  (b) the  aggregate
assets,  liabilities,  earnings  and  equity of the  Subsidiary  Guarantors  are
substantially equivalent to the assets, liabilities,  earnings and equity of the
Company on a consolidated  basis and (c)  management  has  determined  that such
information is not material to investors.
    

                                       26

<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.  SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)

     PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The following pro forma condensed  consolidated  financial  statements give
effect,  as of December 31, 1996, as to the Balance Sheet,  and January 1, 1996,
as to the  Statement  of  Operations,  to  the  Exchange,  the  Merger  and  the
Financings consummated on January 31, 1997, all as described above. In addition,
the pro forma  condensed  consolidated  financial  statements give effect to the
following transactions, which were, directly or indirectly, conditions precedent
to, or result from,  the  Exchange,  the Merger and the  Financings as described
above: (i) the use of the net proceeds from the Financings to repay indebtedness
under the Orion 1 Credit Facility,  to prefund the first six scheduled  interest
payments,  and to pay interest rate hedge  breakage  costs  associated  with the
Orion 1 Credit  Facility,  (ii) the acquisition by Orion of British  Aerospace's
17%  ownership of Orion Asia Pacific for  approximately  86,000 shares of common
stock, (iii) payments of approximately $4.0 million, including accrued interest,
owed to STET, a former limited partner of Orion Atlantic, and (iv) the write-off
of deferred financing fees (such transactions  collectively with the Merger, the
Exchange, and the Financings, the "Transactions").

     The unaudited pro forma condensed  consolidated financial statements do not
purport to present the actual financial position or results or operations of the
Company had the  Transactions in fact occurred on the dates  specified,  nor are
they indicative of the results of operations that may be achieved in the future.

                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                    (AMOUNTS, EXCEPT SHARE AMOUNTS, IN 000'S)
<TABLE>
<CAPTION>

                                                                                          DECEMBER 31, 1996
                                                                                         -------------------
<S>                                                                                      <C>                
Assets
Current assets................................................                           $           149,720
Property and equipment, net...................................                                       320,707
Restricted and segregated cash................................                                       406,937
Deferred financing costs, net.................................                                        25,865
Other assets, net.............................................                                        25,365
                                                                                         -------------------
Total assets..................................................                           $           928,594
                                                                                         ===================

Liabilities and stockholders' equity
Current liabilities...........................................                           $            23,730
Long-term debt................................................                                       779,283
Other liabilities.............................................                                        11,528
Limited Partners' interest in Orion Atlantic..................                                            --
Redeemable preferred stock....................................                                       111,902
Stockholders' equity..........................................                                         2,151
                                                                                         -------------------
Total liabilities and stockholders' equity....................                           $           928,594
                                                                                         ===================

            PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                                                                             YEAR ENDED
                                                                                         DECEMBER 31, 1996
                                                                                         -------------------
Services revenue..............................................                           $          41,847

Operating expenses............................................                                      82,931
Other expense (income)........................................                                      92,546
Net loss......................................................                                    (133,630)
Preferred stock dividend and accretion, net of forfeitures....                                       9,273
                                                                                         -------------------
Net loss attributable to common stockholders..................                           $        (142,903)
                                                                                         ===================
Net loss per common share.....................................                           $          (12.71)
                                                                                         ===================
Weighted average common shares outstanding....................                                  11,247,062
                                                                                         ===================
</TABLE>

                                       27
<PAGE>



                           ORION NETWORK SYSTEMS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.  SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)

     TELEPORT EUROPE ACQUISITION

     On March 26, 1997,  Orion  acquired  German-based  Teleport  Europe GmbH, a
communications  company specializing in private satellite networks for voice and
data services.  Orion purchased the shares of Teleport Europe held by the German
companies,  Vebacom  GmbH  and RWE  Telliance  AG,  now  known  as  o.tel.o  for
approximately $9 million.

10.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                        MARCH 31              JUNE 30             SEPTEMBER 30        DECEMBER 31
                                    ---------------       ---------------       ----------------     ----------------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>                   <C>                   <C>                   <C>            
1996
  Revenues......................    $         7,646       $        10,123       $        12,247       $        11,831
  Loss from operations..........            (10,155)               (8,963)               (7,151)              (10,084)
  Loss before minority interest.            (16,985)              (14,637)              (12,985)              (17,218)
  Net loss......................             (7,251)               (6,760)               (5,796)               (7,388)
  Net loss per share............             (0.70)                (0.65)                (0.55)                (0.72)

1995
  Revenues......................    $         2,508       $         5,238       $         6,201       $         8,336
  Loss from operations..........            (11,891)              (12,038)              (13,525)               (9,377)
  Loss before minority interest.            (15,978)              (18,248)              (19,186)              (19,592)
  Net loss......................             (5,996)               (6,991)               (6,998)               (6,930)
  Net loss per share............             (0.64)                (0.75)                (0.78)                (0.67)
</TABLE>

                                       28